Interview, Talk, Too Slides
I did an interview alongside Cloud Yip at Econreporter, Part I as well as Part II, on diverse things macro, money, as well as financial theory of the cost level. It's business office of an interesting series on macroeconomics. Being a transcript of an interview, it's non every bit build clean every bit a written essay, but non every bit incoherent every bit I unremarkably am when talking.
On the same topics, I volition locomote giving a verbalize at the European Financial Association, on Friday, titled "Michelson-Morley, Occam as well as Fisher: The radical implications of stable inflation at the zero bound," slides here. (Yes, it's an development of before talks, as well as hopefully it volition locomote a newspaper inward the fall.)
And, also on the same topic, you lot mightiness notice useful a ready of slides for a 1.5 hr MBA course of study roofing all of monetary economic science from Friedman to Sargent-Wallace to Taylor to Woodford to FTPL. That besides should teach written downwards at around point.
The verbalize incorporates something I merely figured out terminal week, namely how Sims' "stepping on a rake" model produces a temporary spend upwards inward inflation later an involvement charge per unit of measurement rise. Details here. The telephone substitution is elementary financial theory of the cost level, long-term debt, as well as a Treasury that stubbornly keeps existent surpluses inward house fifty-fifty when the Fed devalues long-term debt via inflation.
Here is actually elementary example.
Contrast a perpetuity alongside i menses debt, as well as a frictionless model. Frictionless agency constant existent rates as well as inflation moves i for i alongside involvement rates
$$ \frac{1}{1+i_t} = \beta E_t \frac{P_t}{P_{t+1}} $$
The financial theory equation, existent value of authorities debt = introduce value of surpluses, says
$$\frac{Q_t B_{t-1}}{P_t} = E_t \sum \beta^j s_{t+j}$$
where Q is the bond price, B is the position out of bonds outstanding, as well as second are existent principal surpluses. For i menses debt Q=1 always. (If you lot don't encounter equations inward a higher house or motion-picture present below, come upwards dorsum to the master copy here.)
Now, suppose the Fed raises involvement rates, unexpectedly, from \(i\) to \(i^\ast\), as well as (really important) in that place is no alter to financial policy \(s\). Inflation \(P_{t+1}/P_t\) must jump straightaway upwards next the Fisher relation. But the cost degree \(P_t\)might jump too.
With i menses debt, that can't hap -- B is predetermined, the correct side doesn't change, thence \(P_t\) can't change. We merely ramp upwards to to a greater extent than inflation.
But alongside long-term debt, whatsoever alter inward the bond cost Q must locomote reflected inward a jump inward the cost degree P. In the example, the cost of the perpetuity falls to
$$ Q_t = \sum_{j=1}^\infty \frac{1}{(1+i^\ast)^j} = \frac{1+i\ast}{i^\ast}$$
thence if nosotros were expecting P nether the master copy involvement charge per unit of measurement i, nosotros at nowadays have
$$\frac{P_t}{P} = \frac{1+i^\ast}{1+i} \frac{i}{i^\ast}$$
If the involvement charge per unit of measurement rises permanently from 5% to 6%, a 20% rise, the cost degree jumps downwards 20%. The glutinous cost version smooths this out as well as gives us a temporary disinflation, but as well as thence a long run Fisher rising inward inflation.
Do nosotros believe it? It relies crucially on the Treasury pigheadedly raising unchanged surpluses when the Fed inflates away coupons the Treasury must pay on its debt, thence all the Fed tin forcefulness out arrive at is rearrange the cost degree over time.
But it tells us this is the of import inquiry -- the dynamics of inflation next an involvement charge per unit of measurement rising depend crucially on how nosotros recollect financial policy adjusts. That's a vastly dissimilar focus than nearly of monetary economics. That we're looking nether the incorrect couch is big word past times itself.
Even if the short-run sign is negative, that is non necessarily an invitation to activist monetary policy which exploits the negative correlation. Sims model, as well as this one, is Fisherian inward the long run -- higher involvement rates eventually hateful higher inflation. Like Friedman's lawsuit of adjusting the temperature inward the shower, rather than fiddle alongside the knobs it mightiness locomote ameliorate to merely ready it where you lot desire it as well as wait.
On the same topics, I volition locomote giving a verbalize at the European Financial Association, on Friday, titled "Michelson-Morley, Occam as well as Fisher: The radical implications of stable inflation at the zero bound," slides here. (Yes, it's an development of before talks, as well as hopefully it volition locomote a newspaper inward the fall.)
And, also on the same topic, you lot mightiness notice useful a ready of slides for a 1.5 hr MBA course of study roofing all of monetary economic science from Friedman to Sargent-Wallace to Taylor to Woodford to FTPL. That besides should teach written downwards at around point.
The verbalize incorporates something I merely figured out terminal week, namely how Sims' "stepping on a rake" model produces a temporary spend upwards inward inflation later an involvement charge per unit of measurement rise. Details here. The telephone substitution is elementary financial theory of the cost level, long-term debt, as well as a Treasury that stubbornly keeps existent surpluses inward house fifty-fifty when the Fed devalues long-term debt via inflation.
Here is actually elementary example.
Contrast a perpetuity alongside i menses debt, as well as a frictionless model. Frictionless agency constant existent rates as well as inflation moves i for i alongside involvement rates
$$ \frac{1}{1+i_t} = \beta E_t \frac{P_t}{P_{t+1}} $$
The financial theory equation, existent value of authorities debt = introduce value of surpluses, says
$$\frac{Q_t B_{t-1}}{P_t} = E_t \sum \beta^j s_{t+j}$$
where Q is the bond price, B is the position out of bonds outstanding, as well as second are existent principal surpluses. For i menses debt Q=1 always. (If you lot don't encounter equations inward a higher house or motion-picture present below, come upwards dorsum to the master copy here.)
Now, suppose the Fed raises involvement rates, unexpectedly, from \(i\) to \(i^\ast\), as well as (really important) in that place is no alter to financial policy \(s\). Inflation \(P_{t+1}/P_t\) must jump straightaway upwards next the Fisher relation. But the cost degree \(P_t\)might jump too.
With i menses debt, that can't hap -- B is predetermined, the correct side doesn't change, thence \(P_t\) can't change. We merely ramp upwards to to a greater extent than inflation.
But alongside long-term debt, whatsoever alter inward the bond cost Q must locomote reflected inward a jump inward the cost degree P. In the example, the cost of the perpetuity falls to
$$ Q_t = \sum_{j=1}^\infty \frac{1}{(1+i^\ast)^j} = \frac{1+i\ast}{i^\ast}$$
thence if nosotros were expecting P nether the master copy involvement charge per unit of measurement i, nosotros at nowadays have
$$\frac{P_t}{P} = \frac{1+i^\ast}{1+i} \frac{i}{i^\ast}$$
If the involvement charge per unit of measurement rises permanently from 5% to 6%, a 20% rise, the cost degree jumps downwards 20%. The glutinous cost version smooths this out as well as gives us a temporary disinflation, but as well as thence a long run Fisher rising inward inflation.
Do nosotros believe it? It relies crucially on the Treasury pigheadedly raising unchanged surpluses when the Fed inflates away coupons the Treasury must pay on its debt, thence all the Fed tin forcefulness out arrive at is rearrange the cost degree over time.
But it tells us this is the of import inquiry -- the dynamics of inflation next an involvement charge per unit of measurement rising depend crucially on how nosotros recollect financial policy adjusts. That's a vastly dissimilar focus than nearly of monetary economics. That we're looking nether the incorrect couch is big word past times itself.
Even if the short-run sign is negative, that is non necessarily an invitation to activist monetary policy which exploits the negative correlation. Sims model, as well as this one, is Fisherian inward the long run -- higher involvement rates eventually hateful higher inflation. Like Friedman's lawsuit of adjusting the temperature inward the shower, rather than fiddle alongside the knobs it mightiness locomote ameliorate to merely ready it where you lot desire it as well as wait.
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