John Cochrane's blog
I wrote a short-ish article for the Journal of Economic Perspectives on Fiscal Theory of the Price Level. It tries to summarize the 700 page book in a readable article with no equations. Let me know how I'm doing -- comments most welcome.
John,"Fiscal theory offers a warning that containing a new inflation will be harder, as interest costs on a large debt and the fiscal costs of debt revaluation will be larger."Fiscal theory is wrong in that it presumes a government must borrow / issue debt in the first place.
Sure but in practical terms, borrowing an issuing debt might occur naturally during recessions when you want to smooth out situations where you have a fall in expenditures but have already committed to spending.
Do you suggest by "presumes a government must borrow" that in the alternative the MMT idea of running a money=debt system with some tax scheme to scoop up excess demand is a viable alternative?I don't think a global economy would trust a national currency, much less as a "reserve currency," if it were hedged in by capital-export controls, as a MMT system would require.(Absent policing of such a barrier, people might just buy gold and hide it; indeed, that would happen locally too.)
James / Joe,Government bonds are a wartime convention. And the reason is this, an individual may be asked to both fund a war by purchasing government bonds AND be required to serve in the military (via conscription or a draft). Government bonds provide a high degree of repayment to the individual should that person be injured and unable to return to his / her normal occupation after the war has been concluded (See US Constitution, 14th Amendment).During peacetime (or at least during a time when a draft / conscription does not exist), government bonds are no longer a necessity. A government can instead sell securities that do not offer the same level of guarantee (equity as I have described it).
Would prefer if “like” was “likely” in first paragraph. “ To believe it that this is a coherent story,” …”it that this” is a bit awkward…maybe dropping the “it” or the “it that”.Loving it so far.
“ A hint of Sargent and Wallace (1981) unpleas- ant arithmetic re-emerges, though by a completely different mechanism.” I have been too lazy to dig through the equations and find an exact analogy in the mechanism between the FTPL and S&W (1980), I appreciate this precise statement. I have been giving the warning you do in the intro about how we are not in the same scenario as the 70s because of our much higher debt ratios to people in casual conversations using S&W (1980) and Reinhardt and Rogoff, this paper will help me formulate it in much clearer and simpler ideas.
“They will regarding the deflation as a “bubble,” or transitory off-equilibrium event that fiscal policy should ignore.” “regarding” should be “regard”.
“Central banks are even more they are forbidden money vacuums, confiscating currency.” …are even more forbidden… possibly?
Last one“Fiscal theory can full determine inflation under an interest rate peg,” i think “fully” is more commonReally enjoyed this paper, thanks.
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This reminds me of Fisher's debt deflation theory. They are both theories of inflation/deflation spirals and about the importance of banks in the case of Fisher and the government in the case of Cochrane not taking on too much debt.
Mr. Kevin Warsh, a former member of the Federal Reserve Board and a distinguished visiting fellow in economics at the Hoover Institution, penned an opinion that appears in the December 12th edition of the on-line The Wall Street Journal titled "The Fed is the Main Inflation Culprit" (subtitle: "The central bank has enabled price increases that may soon pose a risk to financial stability.")Several points in the article are worth noting.
FTPL as developed has expected inflation determined by monetary policy and unexpected inflation by fiscal policy. This seems to be implicitly assuming that the probability distribution of inflation is symmetric. Is this correct? If so, what would happen in the theory if the probability distribution is skewed in some manner? What if the inflation process is a Markov chain of the kind studied by Hamilton, with a "mixed" distribution. WSJ article Dec 13 p A1 by Timiraos and Guildford suggests that there may be such threshhold effects (among other issues with the practical manner in which expected inflation might be measured).
Comments are welcome. Keep it short, polite, and on topic. Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.