I did a podcast with David Beckworth, in his "macro musings" series, on the Fiscal Theory of the Price Level, blogging, and a few other things.
(you should see the link above, if not click here to return to the original).
You can also get the podcast at Sound Cloud, along with all the other ones he has done so far, or on itunes here. For more information, see David's post on the podcast.
It is an awesome interview!
ReplyDeleteSo...gov't debt prices don't make any sense, but they haven't for a while, so who cares...Sounds like other bubbles
ReplyDeleteJohn Cochrane:
ReplyDeleteI am not yet a convert, but there was an interesting "pro" fiscal theory of the price level piece published June 2014 by the Dallas Fed, "Inflation Is Not Always and Everywhere a Monetary Phenomenon" by Antonella Tutino and Carlos E.J.M. Zarazaga
http://www.dallasfed.org/research/eclett/
Befitting any tale about inflation, the Weimar Republic is dutifully mentioned, and the Rentesbank solution. In conclusion the authors state:
"The fiscal theory of the price level argues that what’s true about hyperinfla- tion is valid more generally: Fiscal policy can prevent inflation from rising or falling too much by backing all outstanding nomi- nal government liabilities—interest bear- ing or not—with a stable level of expected future primary government surpluses. By formally incorporating fiscal policy in the analysis of price-level dynamics, the fiscal theory of the price level is better equipped than the conventional monetarist ap- proach to explain why the recent large expansion of the money supply in the U.S. has not caused higher inflation.
The theory implies that the quantitative easing programs, which created money to purchase mortgage-backed securities from the public, preserved price stability because that money is backed by the returns from real estate investments. Similarly, Germany restored price stability after its interwar hyperinflation with its real-estate-backed currency."
That is fascinating So when the Fed bought the MBS, they were fighting inflation!
It also seems to me that monetizing debt, counterintuitively, is anti-inflationary under the FTPL. The government is less indebted, more able to meet obligations.
Indeed the authors say, "Likewise, any money created to pur- chase government debt from the public at market prices is backed by the same primary surpluses that the public already expected would service that debt. As long as the expected primary surpluses back- ing existing government liabilities haven’t changed, there is no reason for the price level to change either."
Well, perhaps as you state in the podcast, FTPL is still maturing, in its infancy, or juvenile years.
Fascinating topic.
Benjamin, rapid money growth is starting to yield a little more inflation than what existed in 2014. But your article there is very interesting.
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