tag:blogger.com,1999:blog-582368152716771238.post1468080448836702653..comments2024-03-29T07:18:14.271-05:00Comments on The Grumpy Economist: Neo-Fisherian caveatsJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-582368152716771238.post-49847048944464643882016-04-09T09:09:33.102-05:002016-04-09T09:09:33.102-05:00This is a fascinating problem that aries when an e...This is a fascinating problem that aries when an economy enters mild deflation---people migrate to cash for savings, and from there move to extensive cash transactions to avoid the tax man. <br /><br />See Japan (below)---they are actually printing more large bills to handle the demand. They have about $7000 (yen equivalent) in circulation per resident. Egads, a typical family of four has $28k under the mattress?<br /><br />Of course, the above-ground economy then has to shoulder a larger fraction of the tax burden--driving more of it underground.<br /><br />----- <br /><br />Japan to print additional ¥10,000 bills as more people stash their cash at home<br />JIJI<br /><br /> APR 7, 2016 ARTICLE HISTORY <br /> PRINT<br /> SHARE<br /> <br /><br /><br />The Finance Ministry plans to increase the number of ¥10,000 bills in circulation, amid signs that more people are hoarding cash.<br />It will print 1.23 billion such notes in fiscal 2016, 180 million more than a year earlier. The number of ¥10,000 bills issued annually leveled off at around 1.05 billion in the fiscal years from 2011 to 2015.<br />Some financial market sources believe it is because more people are keeping their money at home rather than in banks, because interest rates on deposits have fallen to almost zero after the Bank of Japan introduced a negative interest rate in February.<br />The total amount of cash stashed at home is estimated to have surged by nearly ¥5 trillion to some ¥40 trillion in the past year, Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said.<br />He attributed the sharp increase to people not wanting their wealth to become known to authorities following the introduction of the My Number common identification system for tax and social security.<br />In addition, the BOJ’s negative rate policy “may have fueled concerns among the public about depositing their money in banks,” Kumano said.<br />There will be 200 million ¥5,000 bills issued in fiscal 2016, down by 80 million, and 1.57 billion ¥1,000 bills, down by 100 million.<br />Recent BOJ data show daily averages for currency in circulation rose 6.7 percent from a year before to ¥90.3 trillion at the end of February, the sharpest growth in 13 years.<br />The number of ¥10,000, ¥5,000 and ¥1,000 bills in circulation increased 6.9 percent, 0.2 percent and 1.9 percent, respectively."<br /><br />--30--<br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-18580085372734872332016-04-08T11:00:39.944-05:002016-04-08T11:00:39.944-05:00Caio,
"Raising interest rates to fight infla...Caio,<br /><br />"Raising interest rates to fight inflation" and "maintaining a positive real interest rate" are not the same thing.<br /><br />In the first case the central bank is targeting a lower inflation rate - hence the term "fighting" inflation.<br /><br />In the second case the central bank is targeting a real interest rate and not "fighting" inflation per se.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-75982962036698780342016-04-07T12:44:04.260-05:002016-04-07T12:44:04.260-05:00Professor Cochrane,
You said: "Fiscal policy...Professor Cochrane,<br /><br />You said: "Fiscal policy. Fiscal policy deeply underlies monetary policy. In my own "Fisherian" explorations, the fiscal theory of price level is a deep foundation. If the government is printing up money to pay its bills, the central bank can do what it wants with interest rates, inflation is coming anyway."<br /><br />In this section - you're equating interest rate targets with monetary policy. Is that intentional? Just as you indicate that fiscal policy can disrupt the notion that inflation follows nominal rates (i.e., "inflation is coming anyway"), I can imagine monetary policy scenarios where the same is true. Do you disagree? Anonymoushttps://www.blogger.com/profile/09445489809839987633noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81095335074188972202016-04-02T12:14:42.880-05:002016-04-02T12:14:42.880-05:00I believe the Fed make a classic mistake in the la...I believe the Fed make a classic mistake in the late 90's early 2000's when they mistook good disinflation/deflation as the worrisome kind. They become much too accommodative when essentially it was high productivity growth and globalization that was tempering prices. This was good for business and good for the consumer. In 2003 with the economy already recovering the Fed put the pedal to the floor and keep it there too long, fueling the housing and stock market bubbles. We now have a deflationary impulse that is cause by over indebtedness and it is proving intractable.This problem needs fiscal and tax attention. More debt ultimately makes this worse.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-40865059808717954852016-04-02T11:35:09.795-05:002016-04-02T11:35:09.795-05:00Calo,
https://en.wikipedia.org/wiki/Fiscal_theory...Calo,<br /><br />https://en.wikipedia.org/wiki/Fiscal_theory_of_the_price_level<br /><br />"The fiscal theory of the price level is the idea that government fiscal policy affects the price level: for the price level to be stable (to control inflation), government finances must be sustainable: they must run a balanced budget over the course of the business cycle, meaning they must not run a structural deficit."<br /><br />"The fiscal theory states that if a government has an unsustainable fiscal policy, such that it will not be able to pay off its obligation in future out of tax revenue (it runs a persistent structural deficit), then it will pay them off via inflating the debt away."<br /><br />The fiscal theory of the price level DOES NOT stipulate that fiscal policy choices set the absolute price level. It says that fiscal policy choices determine the trajectory for the price level.<br /><br />The fiscal theory does miss one important codicil - even if a government does not run a balanced budget, it can still maintain an independent monetary policy by financing budget deficits with the sale of equity claims on future tax revenue.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-11994694750888902282016-04-01T23:23:44.845-05:002016-04-01T23:23:44.845-05:00They self finance their deficits. As such, bond h...They self finance their deficits. As such, bond holders in Japan hold significant political power.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-46868323377305199202016-04-01T18:10:26.736-05:002016-04-01T18:10:26.736-05:00When you talk about the fiscal policy affecting th...When you talk about the fiscal policy affecting the inflation rate, you are reasoning by the fiscal theory of the price level (FTPL), right?<br /><br />But, the FTPL determines just the level of the price, not the inflation rate (this is still being determined by nominal interest rate - fisher relation). Unless the expectation about the future government surpluses is constantly changing, the fiscal policy will not affect the inflation rate.Caio_acthttps://www.blogger.com/profile/01845827473274692484noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-18587381207769370842016-04-01T15:46:10.812-05:002016-04-01T15:46:10.812-05:00I really can get the fisher relation idea.
Given ...I really can get the fisher relation idea. <br />Given that the real interest rate is determined by the real side of the economy, by arbitrage, nominal interest rate and inflation should move together (admitting a stable real interest rate). By yours posts and the literature, I think most economists agree that this relation will prevail in the long run.<br /><br />But what about the short run? <br />Doesn't almost all the Central Banks in the world raise interest rates to fight against inflation?<br />When did this story begin?<br />What was the initial rationale to carry out this procedure?<br /><br />I think it relied on some kind of rigid expectation. In this way, increasing nominal interest rate means increasing real interest rate and, then, this would weaken the demand today lowering prices today. Thus, at least in the short run, increase nominal interest rate leads to lower inflation.<br /><br />But, does it fit in some rational expectation model? If I'm not wrong, it's exactly what are you looking for.<br /><br />What are the evidences in favor and against this effect in the short run? Are they robust?<br /><br />That said, I also would like to know why among economists this simple logic of the effect of nominal interest rate on inflation - maybe coming from traditional IS/LM (rigid expectations!) - is so entrenched. In the place I study, this effect is taken for granted. Questioning it is almost a heresy despite the fact that rational expectation hypothesis is almost unquestionable there. So, what is the logic behind this effect!?<br /><br />I really don´t understand why this question - the short run effect of nominal interest rate on inflation - is not largely discussed among academics.Caio Telesnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-54284651737159369962016-04-01T14:51:30.599-05:002016-04-01T14:51:30.599-05:00I really can get the fisher relation idea.
Given ...I really can get the fisher relation idea. <br />Given that the real interest rate is determined by the real side of the economy, by arbitrage, nominal interest rate and inflation should move together (admitting a stable real interest rate). By yours posts and the literature, I think most economists agree that this relation will prevail in the long run.<br /><br />But what about the short run? <br />Doesn't almost all the Central Banks in the world raise interest rates to fight against inflation?<br />When did this story begin?<br />What was the initial rationale to carry out this procedure?<br /><br />I think it relied on some kind of rigid expectation. In this way, increasing nominal interest rate means increasing real interest rate and, then, this would weaken the demand today lowering prices today. Thus, at least in the short run, increase nominal interest rate leads to lower inflation.<br /><br />But, does it fit in some rational expectation model? If I'm not wrong, it's exactly what are you looking for.<br /><br />What are the evidences in favor and against this effect in the short run? Are they robust?<br /><br />That said, I also would like to know why among economists this simple logic of the effect of nominal interest rate on inflation - maybe coming from traditional IS/LM (rigid expectations!) - is so entrenched. In the place I study, this effect is taken for granted. Questioning it is almost a heresy despite the fact that rational expectation hypothesis is almost unquestionable there. So, what is the logic behind this effect!?<br /><br />I really don´t understand why this question - the short run effect of nominal interest rate on inflation - is not largely discussed among academics.Caio Telesnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60021630448003903042016-04-01T01:29:37.736-05:002016-04-01T01:29:37.736-05:00Is you correspondent from Russia? Because on each...Is you correspondent from Russia? Because on each "correspondent tells me..." point I have 100% recognition of what we're dealing with here.Sergey Egievhttps://www.blogger.com/profile/06949192344508519486noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-25207650056439231102016-03-31T23:38:20.879-05:002016-03-31T23:38:20.879-05:00This comment has been removed by a blog administrator.Philiphttps://www.blogger.com/profile/16538860062019540619noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-64516913196437662322016-03-31T22:51:58.859-05:002016-03-31T22:51:58.859-05:00Add on:
How did Japan sink into deflation for 20 ...Add on:<br /><br />How did Japan sink into deflation for 20 years despite chronic federal deficits? Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-49341405583661962522016-03-31T22:32:45.833-05:002016-03-31T22:32:45.833-05:00The last two posts are fascinating.
Yet--Preside...The last two posts are fascinating. <br /><br />Yet--President Ronald Reagan ran large deficits, both primary (operating) and total. Perhaps it was then that the mantra "deficits don't matter" seized the GOP. <br /><br />Volcker then jacked up rates to high teens, and inflation sank thereafter to the mid-single digits, from low double digits. Inflation was there when Bush The Elder took over. Back in those days, 5% inflation was accepted as "good enough." <br /><br />Certainly, in the 1980s public could not have anticipated the Clinton years federal budget surplus. The intelligentsia investing public did not, and there was much hand-wringing about the ever-growing national debt. Treasury rates followed inflation down thereafter, as the investing public never quite believed inflation would keep sinking. Great time to own T-bonds, btw.<br /><br />Somehow the Volcker years just don't fit the neo-Fisherian model. <br /><br />A couple other quibbles: You use a Phillips Curve assumption, but in the past 20 years it is more of a Phillips Phlat-line. No matter the unemployment rate, inflation does not seem to rise. In Japan even more so, dead inflation with essentially no unemployment. Same in Thailand, where there are chronic labor shortages, but no inflation. <br /><br />Is the Phillips Curve dead for some sort of structural reasons? Does your model make sense if the Phillips Curve is dead? <br /><br />Still, lots of fun to read. Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.com