tag:blogger.com,1999:blog-582368152716771238.post8881164720247253009..comments2021-03-04T22:17:45.800-06:00Comments on The Grumpy Economist: Whither inflation?John H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger55125tag:blogger.com,1999:blog-582368152716771238.post-5899843846211926882015-09-27T14:08:28.612-05:002015-09-27T14:08:28.612-05:00Those upper limits on the sums should be "t&q...Those upper limits on the sums should be "t"? Or relative to whatever time the future policy change was announced?<br /><br />Also in this model, if there's a positive "inflation shock" - inflation tries to jump away and above from the equilibrium path given by (3), if that makes sense - then that is expansionary, no? In order to get back on the stable path the output gap has to also increase.YouNotSneaky!https://www.blogger.com/profile/06378267534638281151noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-91607034859660220302015-09-09T19:53:20.613-05:002015-09-09T19:53:20.613-05:00Inflation likely has to do much more with fiscal p...Inflation likely has to do much more with fiscal policy than monetary policy. Let us use an extreme scenario consider likely outcomes. Suppose tomorrow that the the US government decided to cut all tax rates to 1% and committed to this for the foreseeable future. This would add a large amount of money to circulation and likely inspire inflation. The opposite would be true if the US government decided to raise all tax rates to 90%. This would drain large amounts of money from the economy and likely cause deflation.<br /><br />The central bank has much less ability to control inflation and deflation. Consider if it raised interest rates to 20% tomorrow. The immediate reaction may likely be to inspire deflation. However, once bondholders started receiving 20% interest on their money the amount of money in circulation would be much greater than if bond holders were receiving 2% on their money. So the outcome could actually be a quick deflation, followed by a slow inflation. Ultimately the effect is ambiguous. Regardless, as compared to tax/fiscal policy, monetary policy is much less potent a device for affecting inflation. So in the interest rate data we mostly see the effect of fiscal policy overwhelming the monetary policy. <br /><br />Note the curious case of Japan. Even with all the deficit spending, and low interest rates, inflation is subdued. That's because they haven't committed to lower tax rates.<br /><br />The market is indicating low expected inflation because it does not foresee any drastic commitments by governments to cut taxes or drastically increase deficit spending. In fact, most economies have been signaling the opposite and adopting austerity policies (or at least overtures). Thus governments are signaling a commitment to low deficits and status quo tax policies. Or in other words, tight money. <br /><br />-Greg V<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9343578031901129492015-09-05T12:33:26.673-05:002015-09-05T12:33:26.673-05:00I here have many questions that only time and an o...I here have many questions that only time and an open mind will solve, as you mentioned many ideas had been proven wrong in the last seven years. What once was considered fact now is mere rumor, this idea of slower growth and how inflation will steadily keep rising in the long term. The idea of raising rates subject to a healthy state of the economy (unemployment, inflation) everything must be aligned, nothing can be left to error. FED authorities as you rightly mention have this impeding question to solve, the faster the better. And again the idea of this new bomb, and how this rates will shake the foundations. Thank you very much for posting this professor Cochrane. Mario Antonio Bravo Larreahttps://www.blogger.com/profile/14334472856103764842noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-11274239089602687002015-09-04T11:28:00.637-05:002015-09-04T11:28:00.637-05:00John, I would also add that along marrying your Th...John, I would also add that along marrying your Theory, we should convene that extreme volatility can also occur during hyperinflation periods (honestly I don't know how this could happen, but maybe an asteroid! http://www.express.co.uk/news/science/592987/End-of-the-world-asteroid-Blood-Moon-September-apocalypse-armageddon-comet-meteor).<br /><br />I suggest you the reading of Cole's original idea about that: http://www.cboe.com/rmc/2013/Day1-Session3-Cole.pdf<br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9211365842452407082015-09-04T04:35:34.470-05:002015-09-04T04:35:34.470-05:00Prof. John, what about non-linearity of your descr...Prof. John, what about non-linearity of your described process?<br />I mean look and plot rising nominal rates and inflation: when they both starts from even more low levels, it seems less and less manageable the rising in CPI!<br />Remember we are at zero bound at a pixel time. FED could be wiped out of all its capital. Ugly times ugly, maybe Nomura's Chief Economist was right (he had a similar conclusion like you) ==> http://blogs.cfainstitute.org/investor/2014/07/03/nomuras-richard-koo-on-balance-sheet-recessions-and-the-qe-trap-video/<br />...from min. 45.00 till end<br />Fasten our seatbeltsAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73076909722924809092015-09-03T23:07:19.272-05:002015-09-03T23:07:19.272-05:00If the Fed set a permanent 0% rate, do you need a ...If the Fed set a permanent 0% rate, do you need a Fed after that point?<br /><br />Is it in the best interest of the Fed to set a permanent 0% rate recognizing that a permanent 0% rate may threaten it's own existence?<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-68716317555055070922015-09-03T22:14:00.449-05:002015-09-03T22:14:00.449-05:00Greg,
First, the exact line from Cochrane's p...Greg,<br /><br />First, the exact line from Cochrane's post is:<br /><br />"But in 2008, interest rates hit zero."<br /><br />The fed funds rate (singular) was reduced to zero. The fed discount rate remains at 0.75%. What are the other interest rates (plural) that John is referring to?<br /><br />Yes, banks and merchants can come to terms on a lending arrangement irrespective of what the Fed does, but it does not appear that Cochrane was referring to the singular Fed Funds rate.<br /><br />Finally, the point I was making remains - any transaction (lending or otherwise) should be mutually beneficial.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89882777217100191372015-09-03T18:51:33.213-05:002015-09-03T18:51:33.213-05:00John, would incorporating a "net base money&q...John, would incorporating a "net base money" figure help? Bank reserves are effectively equity capital. A seriously overleveraged banking system might absorb immense volumes of excess reserves - perhaps with the shadow banking liabilities as the non-book offsetting liabilities - without moving the needle of NGDP much. Preexisting debt has already immunized the effects of additional reserves. Base money netting out liabilities might be the better NGDP/inflation metric. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73444640319104904812015-09-03T16:01:45.597-05:002015-09-03T16:01:45.597-05:00Raising Rates could actually Stimulate the US Econ...Raising Rates could actually Stimulate the US Economy<br /><br />Given that private sector borrowing demand for investment may well be inelastic to the current ultra-low level of interest rates, raising rates could actually stimulate the economy. <br /><br />Since interest on excess reserves would likely be funded by additional government borrowing, the sectoral balances identity means higher rates would be stimulative as long as aggregate private sector borrowing was inelastic to a rate rise. <br /><br />If rate policy was well communicated, raising rates from zero to 1% could plausibly have no negative effect on aggregate borrowing demand. But the Fed should clearly resolve its "dot-plot disconnect" (ie. the Fed's expectation of its terminal rate is far above current market consensus) as soon as possible, to placate fears that rates would become restrictive too quickly. Indeed such a disconnect may be the true cause of volatility rather than a rate rise, per se. <br /><br />Vice versa, QE is actually a form of austerity when borrowing demand is inelastic. Unless QE stimulates private sector borrowing demand enough to offset the Fed's own profits (money taken out of the economy), then the sectoral balances identity means QE must have a net restrictive effect. <br /><br />Everything hinges on the response of private sector borrowing to changes in current ultra-low interest rates, which itself depends on the quality of Fed communication as they withdraw from unprecedented market manipulation. It is plausible that a return to unmanipulated bond markets could spur greater borrowing for investment. <br /><br />Thus Larry Summers may himself be making a dangerous mistake (FT article: “The Fed Looks Set to Make a Dangerous Mistake, FT August 24th): <br />http://www.ft.com/intl/cms/s/2/f24c9a5c-49e9-11e5-9b5d-89a026fda5c9.html#ft-article-comments <br /><br />Similarly Bridgewaters' expectations of QE4 could prove erroneous: <br />https://www.linkedin.com/pulse/dangerous-long-bias-end-supercycle-ray-dalio <br /><br />In summary, given that 1) current economic conditions have no precedent, 2) the response of private sector borrowing for investment depends critically on Fed communication as well as other factors, 3) future Fed communication cannot be predicted with any certainty, then dire forecasts from high profile commentators could be more damaging to the US economy than a small rate rise.Michael Bullhttps://www.linkedin.com/grp/post/2830972-6044861979569463297noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77989180528615508942015-09-03T14:39:34.999-05:002015-09-03T14:39:34.999-05:00For a blog post, equation (3) is the perfect-fores...For a blog post, equation (3) is the perfect-foresight solution. The stochastic solution has an E_{t+1} on the right hand side. I wrote down the solution at time t+1 just because it made the sums on the right hand side prettier. When you're looking at an impulse-response function, which this is, expected future shocks are zero. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-68985608660598863572015-09-03T14:17:05.574-05:002015-09-03T14:17:05.574-05:00Equations (1) and (2) of the model describe expect...Equations (1) and (2) of the model describe expectations at time t of inflation (π) and output gap (x) in the period labelled t+1. Eq. (1) and (2) can be resolved to obtain uncoupled equations describing the inflation and output gap expectations at time t. If the model specification is, using output gap as an example, x(t+1) = f(x(t), π(t) ; β, κ, σ) + ε(t) where f(...) is the function describing the expected path of x(t), and ε(t) is a disturbance term having zero mean and variance ν(t), then the equations (3) and (4) are mis-specified. In other words, eqn. (3) and (4) omit the possibility of innovations (disturbances) affecting the path of x(t) and π(t), i.e., actual output gap and actual inflation. Beyond that narrow observation, the model also omits the possibility of shocks as might be generated in one or more time-varying Poisson processes. Issues around 'controllability' and 'observability' would also have to be explored if the model is intended as a specification of a control system (i.e., FRB policy moves).Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37801624672057772732015-09-03T09:49:54.030-05:002015-09-03T09:49:54.030-05:00Firstly Restly, the zero rates being talked about ...Firstly Restly, the zero rates being talked about do NOT mean 0% interest on all lending within the economy. If the Fed set a permanent 0% rate, that would not stop merchants and banks from charging whatever % interest they wished on their financing.<br />Secondly, free consumer goods is not even remotely the same as low intrabank lending rates on reserves.Greghttps://www.blogger.com/profile/03139782404004492965noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-23531095536924069352015-09-02T22:20:29.860-05:002015-09-02T22:20:29.860-05:00I can begin to see that adding expectational opera...I can begin to see that adding expectational operators appears to turn the equation into a functional relationship, although I'm not quite convinced or can't quite see it. If you took your price = exp'd pv of divs equation and multiplied both sides, to preserve the equality, by the price of fish and then you could say the price of fish is a function of the exp'd pv of divs. That's what it seems you are doing with your first few equations in your paper.<br /><br />Going back to apples, if you said:<br /><br />Weight of box = no. of apples X unit weight<br /><br />and<br /><br />unit weight = funct(rainfall, sunlight, fertilizer)<br /><br />then<br /><br />weight of box = no. of apples X funct(rainfall, sunlight, fertilizer)<br /><br />This is clearly a functional relationship. It bears a hypothesis which can be tested.<br /><br />It seems to me the price = e'd pv of divs isn't quite the same sort of relationship and heading for the realm of tautology in which case nothing new is being said. <br /><br />Henry<br /><br /><br />Henry.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-59992760244216836252015-09-02T20:49:48.638-05:002015-09-02T20:49:48.638-05:00Is price = expected present value of dividends a t...Is price = expected present value of dividends a tautology? It's the same equation. Of course, if you discount at the ex-post rate of return it is a tautology, so in some sense both equations require you to be specific about discount rates to be useful. But price = expected present value of dividends seems to be very useful, and, again, it's the same equation. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-4559077620949782015-09-02T20:45:02.427-05:002015-09-02T20:45:02.427-05:00So if you average Keynesian and neo-Keynesian don&...So if you average Keynesian and neo-Keynesian don't you get the right answer?<br /><br />I've assumed since the 90's that we would have deflation as the boomers retired and it sounds like that is what's going on. <br /><br />I haven't been paying close attention but, given the apparent current stability, can it not unwind the QE open market operations and let inflation land where it will?khodgehttps://www.blogger.com/profile/14159304285391375601noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-59275406847397773152015-09-02T20:00:01.944-05:002015-09-02T20:00:01.944-05:00Just to clarify a couple of points.
1. When you ...Just to clarify a couple of points. <br /><br />1. When you say you detest zero growth, I assume that would extend to the loss of actual output. Is the economy back at long term trend in terms of actual output. Or just back on trend in terms of the current growth rate. <br /><br />2. Even if actual output were back at trend, do we not care about the lost output while the economy was below trend.<br /><br />3. Regarding "timing... in the rate that the Fed pays banks on reserves." Had the Fed not decided to start paying IOR in October of 2008 while still increasing the monetary base at the rate which they actually did, would this have had no effect on output? Or would it just have impacted prices? Or would a fourfold expansion in the base with no significant increase in reserves have had no effect on either output or prices? Or... does the rate paid not have any effect on the level of reserves?<br /><br />Anonymoushttps://www.blogger.com/profile/01354902389242286031noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32498417360408007792015-09-02T14:46:17.272-05:002015-09-02T14:46:17.272-05:00John,
I have been studying your paper “Monetary P...John,<br /><br />I have been studying your paper “Monetary Policy with Interest on Reserves”. I am wondering if you could clarify some issues for me.<br />.<br />The first equation you present says essentially (dispensing with the summation operator for clarity):<br />.<br />Nominal value of bonds/price deflator = expectational operator X real discount rate X future surpluses <br />.<br />To me this is a tautology, an accounting relationship almost and not a functional relationship at all.<br />.<br />You then switch price deflators around and end up with:<br />.<br />Nom. Value of bonds/price deflator X expect op. X inflation index = expect op. X real dis. rate X future surpluses<br />.<br />To me this is still a tautology with some manipulations added.<br />.<br />You then immediately conclude that:<br />.<br />-unexpected inflation is determined entirely by expectations of future surpluses<br /><br />-govt. can determine expected inflation by nominal bonds sales.<br />.<br />To me, this is like saying the following:<br />.<br />Weight of box of apples = no. of apples X unit weight (i.e. a tautology)<br />.<br />Weight of box apples X price index = no. of apples X unit weight X price index<br />.<br />And then conclude:<br />.<br />Price index is a function of the no. of apples (just because these variables are on opposite sides of an equality sign) which of course is absurd.<br />.<br />I’m afraid this does not make sense to me. <br />.<br />Can you clarify?<br />.<br />Henry<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-3129658809992418872015-09-02T11:26:34.089-05:002015-09-02T11:26:34.089-05:00Thank you for the insightful response.Thank you for the insightful response.elihttps://www.blogger.com/profile/10220404092693775249noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-34329877134582624882015-09-02T10:46:27.867-05:002015-09-02T10:46:27.867-05:00John,
I have always had a problem with the notion...John,<br /><br />I have always had a problem with the notion of a single "natural rate" of interest.<br /><br />Picture a barter economy with debt contracts negotiated in terms of real goods - for instance iron ore, steel, and locomotives.<br /><br />I lend iron ore now to receive steel at some future point in time. There will be a iron ore / steel interest rate.<br /><br />You lend steel now to receive a locomotive at some future point in time. There will be a steel / locomotive interest rate.<br /><br />These two interest rates will not be the same. You see the same type of thing today with different interest rates for corporate debt reflecting credit risk (AAA thru junk).<br /><br />If we try to create a "single good" by creating a price index (NGDP Deflator for instance) and then back calculate real GDP from nominal GDP, we can look at the "real growth rate" and interpret that as some measure of the natural rate of interest.<br /><br />But the composition of the price index is always backward looking (what price was paid for goods that were previously purchased), while a central bank trying to hit a "natural rate" of interest should be forward looking.<br /><br />Potential GDP (real and nominal) measures are forward looking, but they will miss technological leaps and destructive events. FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-38678884457167925232015-09-02T10:10:32.910-05:002015-09-02T10:10:32.910-05:00Good graph, good question, and good hunch (fiscal ...Good graph, good question, and good hunch (fiscal policy). The third issue is the "natural rate." It's very hard to measure, and it varies. The non-inflationary real rate varies over time, so the non-inflationary nominal rate should vary over time as well. That makes a fixed peg a dubious monetary policy over long periods of time. After WWII, with a huge need to rebuild capital, arguably the natural rate was higher. Of course it's darn hard to define let alone measure. All this episodes need serious investigation, not just punditry. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-57610654743937405102015-09-02T09:45:00.534-05:002015-09-02T09:45:00.534-05:00John,
The last time we had an effective sustaine...John, <br /><br />The last time we had an effective sustained peg was during the Great Depression and more explicitly during the era that culminated in the Treasury/FED accord. The attached link shows nominal short rates, CPI inflation, and the unemployment rate (spliced from different series). I understand that during this period we were still tied to some version of a gold standard but what explains the inflation response during this period (assuming these variables were appropriately measured). The response is much more pronounced than the current period. It seems we had bursts of high inflation and disinflation during this period. I suspect it may have something to do with the stance of fiscal policy at the time (2 wars). <br /><br />I'd be interested in your thoughts on this and particularly on the FED/Treasury accord episode because it is, at least i think so, an example of explicit coordination between fiscal and monetary policy. This state of affairs resembles some aspects of your model described in "monetary policy with interest on reserves" (though i'm only halfway through it). <br /><br />https://research.stlouisfed.org/fred2/graph/?g=1Kbl<br /><br />Here is a link to the graph with just inflation and short rates.<br />https://research.stlouisfed.org/fred2/graph/?g=1Kc3<br />elihttps://www.blogger.com/profile/10220404092693775249noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58905560297615169432015-09-02T04:48:47.537-05:002015-09-02T04:48:47.537-05:00John,
These equations are linearized around a zer...John,<br /><br />These equations are linearized around a zero inflation steady state. In a FTPL world with a positive nominal interest rate, inflation is positive. Is that a problem? The solution will not be as accurate, right?Anonymoushttps://www.blogger.com/profile/12276779525931585656noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-38729422196606343142015-09-01T19:57:52.730-05:002015-09-01T19:57:52.730-05:00If I am reading your simulation graph correctly, t...If I am reading your simulation graph correctly, the model predicts that inflation will rise in response to an increase in interest rates but that output would also decline. I have a basic question: Why would someone undertake this kind of policy which causes output to fall and inflation to rise? Maybe governments that want to inflate their debts away would undertake such a policy but the negative growth in output (and for quite a while at that based on the simulation) would almost certainly result in the government getting thrown out of office.<br /><br />The Neo-Fisherian approach you are advocating suggests that money supply falls less than output when interest rates increase - only then can you have inflation in the sense of "too much money chasing too few goods". Exactly why should this happen? Stated differently, why is output so much more sensitive to rates than money supply? What evidence do we have to support this differential in the relative sensitivities?<br /><br />GaneshAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-46484629460063763322015-09-01T12:52:45.911-05:002015-09-01T12:52:45.911-05:00I detest it. I also think that the kinds of moneta...I detest it. I also think that the kinds of monetary policy we're talking about -- the timing of a few percentage point differences in the rate that the Fed pays banks on reserves -- has next to nothing to do with long run growth. Prayer is more effective. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-8368421217284181492015-09-01T12:47:02.184-05:002015-09-01T12:47:02.184-05:00John,
How do you like zero growth?John,<br />How do you like zero growth?Anonymoushttps://www.blogger.com/profile/01354902389242286031noreply@blogger.com