Last Fri Apr 1, Eric Leeper Tom Coleman in addition to I organized a conference at the Becker-Friedman Institute, "Next Steps for the Fiscal Theory of the Price Level." Follow the link for the whole agenda, slides, in addition to papers.
The theoretical controversies are behind us. But how make nosotros use the financial theory, to sympathise historical episodes, data, policy, in addition to policy regimes? The thought of the conference was to acquire together in addition to attention each other to map out this the agenda. The hateful solar daytime started with history, moved on to monetary policy, in addition to hence to international issues.
Influenza A virus subtype H5N1 mutual topic was diverse forms of price-related financial rules, financial analogues to the Taylor dominion of monetary policy. In a unproblematic form, suppose primary surpluses rising with the cost level, as
\[ b_t = \sum_{j=0}^{\infty} \beta^j \left( s_{0,t+j} + s_1 (P_{t+j} - P^\ast) \right) \]
where \(b_t\) is the existent value of debt, \(s_{0,t}\) is a sequence of primary surpluses budgeted to pay off that debt, \(P^\ast\) is a price-level target in addition to \(P_t\) is the cost level. \(b_t\) tin last existent or nominal debt \( b_{t}= B_{t-1}/P_t\), but I write it every bit existent debt to emphasize the point: This equation also tin create upwards one's hear cost levels \(P_t\). If inflation rises, the authorities raises taxes or cuts spending to soak upwards extra money. If inflation declines, the authorities does the opposite, putting extra money in addition to debt inwards the economic scheme but inwards a way that does non trigger higher time to come surpluses, hence it does force upwards prices.
(Note: this post service has embedded figures in addition to mathjax equations. If the concluding paragraph is garbled or y'all don't come across graphs below, go here.)
That thought surfaced inwards many of the papers.
The morning time had several papers studying the gilded measure in addition to related historical arrangements. To a financial theorist the gilded measure is actually a financial commitment. No gilded measure has ever backed its banking concern complaint number 100%; in addition to none has fifty-fifty dreamed of backing its nominal authorities debt 100%. If a authorities had that much gold, in that location would last no indicate to borrowing.
So a gilded measure is a commitment to heighten taxes, or to borrow against credible time to come taxes, to acquire plenty gilded should it ever last needed. The gilded measure says, nosotros commit to pay off this debt at one, in addition to entirely one, cost level. If inflation gets big, people volition initiative off to desire to telephone substitution money for gold, in addition to we'll heighten taxes. If inflation gets also low, people wills tart to telephone substitution gilded for money, in addition to we'll impress it upwards every bit needed. Usually, inwards the financial theory,
\[ \frac{B_{t-1}}{P_t} = E_t \sum_{j=0}^{\infty} \beta^j s_{t+j}\]
the expectation of time to come surpluses is a combat nebulous, hence inflation powerfulness wander roughly a lot similar stock prices. The gilded measure is a way to commit to exactly the correct path of surpluses that stabilize the cost level.
Influenza A virus subtype H5N1 summary, with apologies inwards advance to authors whose points I missed or misunderstood:
Part I: History
George Hall presented his move with Tom Sargent on the history of U.S. debt limits, together with a fantastic novel information assault U.S. debt that volition last real useful going forward.
François Velde in addition to Christophe Chalmley took us on a lighting tour of monetary arrangements across history, prompting a thoughtful give-and-take on exactly where Fiscal theory starts to thing in addition to where it actually is non relevant. (François easily gets the prize for the best develop of slides. Picking exactly ane was hard.)
Michael Bordo in addition to Arunima Sinha presented an analysis of suspensions of convertibility: Governments temporarily abandon the gilded measure during war, hence become dorsum at parity afterward. Maybe. By going dorsum afterward, people are willing to manage a lot of unbacked debt in addition to currency during the war. But sometimes the financial resources to become dorsum afterward are tough to get, the benefits of establishing credibility hence y'all tin borrow inwards the side past times side state of war seem farther off. When people are unsure whether the province volition become back, the wartime inflation is worse, in addition to the cost of going dorsum on parity are heavier. They analyze French Republic vs. Britain after WWI.
Martin Kleim took us on a tour of a large inflation inwards a previous European currency union, the Holy Roman Empire inwards the early on 1600s. Europe has had currency marriage ceremony without financial marriage ceremony for a long time, nether diverse metallic element standards in addition to coinages. In this illustration little states, nether financial pull per unit of measurement area from the thirty years' war, started to debase little coins, leading to a large inflation. It ended with an understanding to become dorsum to parity, with the states absorbing the losses. (In my equation, they needed a lot of surpluses to tally \(P\) with \(P^\ast\)). We had an interesting give-and-take on exactly where those funds came from. Disinflation is ever in addition to everywhere a financial reform.
Margaret Jacobson presented her move with Eric Leeper in addition to Bruce Preston on the terminate of the gilded measure inwards the U.S. inwards the 1930s. (Eric modestly stated his contribution to the newspaper every bit finding the matlab color code for gold, every bit shown inwards the graph.) Margaret in addition to Eric translate the financial statements of the Roosevelt Administration to say that they would run unbacked deficits until the cost grade returned to its previous level, the \(P^\ast\) inwards my higher upwards equation. Much give-and-take followed on how governments today, if they actually desire inflation, could accomplish something similar.
Part II Monetary Policy
Chris Sims took on that number directly. If y'all desire inflation, exactly running large deficits powerfulness non help. Hundreds of years inwards which governments built upwards hard-won reputations that when they borrow money, they pay it off, are difficult to upend immediately. Even if y'all desire to intermission that expectation -- all our governments accept mixed promises of stimulus at nowadays with deficit reduction later. A devaluation would help, but nosotros don't accept a gilded measure against which to devalue, in addition to non everyone tin devalue relative to each other's currency.
Chris' bottom describe of piece of occupation is a lot similar Margaret in addition to Eric's, in addition to my financial Taylor rule,
Steve Williamson followed with a thoughtful model total of surprising results. The stock of money does non matter, but fed transfers to the treasury do. (I hope I got that right!)
My presentation (slides also here on my webpage) took on the "agenda" question. The basic financial equation is
\[\frac{B_{t-1}}{P_t} = E_t \sum M_{t,t+j} s_{t+j} \]
For the projection of matching history, data, analyzing policy in addition to finding amend regimes, I opined nosotros accept spent also much fourth dimension on the \(s\) financial part, in addition to non nearly plenty fourth dimension on the \(M\) discount charge per unit of measurement part, or the \(B\) part, which I map to monetary policy.
I argued that inwards monastic enjoin to sympathise the cyclical variation of inflation -- inwards recessions inflation declines piece \(B\) is rising in addition to \(s\) is declining -- nosotros postulate to focus on discount charge per unit of measurement variation. More generally, changes inwards the value of authorities debt due to involvement charge per unit of measurement variation are plausibly much bigger than changes inwards expected surpluses. As involvement rates rise, authorities debt volition last worth a lot less, an additionan inflationary pull per unit of measurement area that is frequently overlooked.
Then I presented brusk versions of recent papers analyzing monetary policy inwards the financial theory of the cost level. Interest charge per unit of measurement targets with no alter inwards surpluses tin create upwards one's hear expected inflation, but the neo-Fisherian conundrum remains.
Harald Uhlig presented a skeptical view, provoking much discussion. Some principal points: large debt in addition to deficits are non associated with inflation, in addition to M2 demand is stable.
I found Harald's critique quite useful. Even if y'all don't manage with something, knowing that this is how a actually sudden in addition to good informed macroeconomist perceives the issues is a vital lesson. I answered somewhat impertinently that nosotros addressed these issues fifteen years ago: High debt comes with large expected surpluses, exactly every bit inwards financing a war, because governments desire to borrow without creating inflation. The stability of M2 velocity does non isolate displace in addition to effect. The chocolate/GDP ratio is stable too, but eating to a greater extent than chocolate volition non increment GDP.
But Harald knows this, in addition to his overall indicate resonates: You guys postulate to uncovering something similar MV=PY that easily organizes historical events. The obvious graph doesn't work. Irving Fisher came upwards with MV=PY, but it took Friedman in addition to Schwartz using it to brand the thought come upwards alive. That is the role of the whole conference.
Francesco Bianchi presented his move with Leonardo Melosi on the Great Recession. New Keynesian models typically predict huge deflation at the naught bound. Why didn't this happen? They specify a model with shifting financial vs money dominant regimes. The measure model specifies that in ane lawsuit nosotros exit the naught saltation nosotros become correct dorsum to a money-dominant, Taylor-rule regime with passive financial policy. However, if in that location is a risk of going dorsum to a fiscal-dominant regime for a while, that changes expectations of inflation at the terminate of the naught bound. Even little changes inwards those expectations accept large effects on inflation during the naught saltation (Shameless plug for the New Keynesian Liquidity Trap which explains this indicate real simply.) So, every bit y'all come across inwards the graph above, the "benchmark" model which includes a probability of reverting to a financial regime after the naught bound, produces the mild recession in addition to disinflation nosotros accept seen, compared to the measure model prediction of a huge depression.
Fiscal policy is political of course. Campbell Leith presented, alongside other things, an intriguing tour of how political scientists shout out upwards nearly political determinants of debt in addition to deficits. My snarky quip, nosotros learned with peachy precision that political scientists don't know a heck of a lot to a greater extent than than nosotros do! But if so, that is also wisdom.
Part III International
Alexander Kriwoluzky presented thoughts on a financial theory of telephone substitution rates, applying it to the U.S. vs. Germany, the abandonment of the gilded measure in addition to switch to floating rates inwards the early on 1970s. An telephone substitution charge per unit of measurement peg way that FRG must import U.S. financial policy every bit well, importing the deficits that back upwards to a greater extent than inflation. FRG didn't desire to make that. People knew that, hence a shift to floating rates was inwards the air. Expectations of that shift tin explicate the involvement differential in addition to apparent failure of uncovered involvement parity.
Last but sure non least, Bartosz Maćkowiak presented a thoughtful analysis of "Monetary-Fiscal Interactions in addition to the Euro Area’s Malaise" articulation move with Marek Jarosińsky.
Echoing the financial Taylor dominion thought running through hence many talks, they advise a financial rule
\[ S_{n,t} = \Psi_n + \Psi_B \left( B_{n,t-1} - \sum_n \theta_n B_{n,t-1} \right) + \psi_n (Y_{n,t}-Y_n) \]
In words, each country's surplus must react to that country's debt \(B_n\), but total European Union surpluses make non react to total European Union debt. In this way, the European Union is "Ricardian" or "fiscal passive" for each country, but it is "non-Ricardian" or "fiscal active" for the European Union every bit a whole. In their simulations, this financial commitment has the same beneficial effects running through Leeper in addition to Jabcobson, Bianchi in addition to Melosi, Sims, in addition to others -- but maintaining the thought that private countries pay their debts.
Influenza A virus subtype H5N1 large thank y'all to the Harris School in addition to the Becker-Friedman Institute who sponsored the conference.
The theoretical controversies are behind us. But how make nosotros use the financial theory, to sympathise historical episodes, data, policy, in addition to policy regimes? The thought of the conference was to acquire together in addition to attention each other to map out this the agenda. The hateful solar daytime started with history, moved on to monetary policy, in addition to hence to international issues.
Influenza A virus subtype H5N1 mutual topic was diverse forms of price-related financial rules, financial analogues to the Taylor dominion of monetary policy. In a unproblematic form, suppose primary surpluses rising with the cost level, as
\[ b_t = \sum_{j=0}^{\infty} \beta^j \left( s_{0,t+j} + s_1 (P_{t+j} - P^\ast) \right) \]
where \(b_t\) is the existent value of debt, \(s_{0,t}\) is a sequence of primary surpluses budgeted to pay off that debt, \(P^\ast\) is a price-level target in addition to \(P_t\) is the cost level. \(b_t\) tin last existent or nominal debt \( b_{t}= B_{t-1}/P_t\), but I write it every bit existent debt to emphasize the point: This equation also tin create upwards one's hear cost levels \(P_t\). If inflation rises, the authorities raises taxes or cuts spending to soak upwards extra money. If inflation declines, the authorities does the opposite, putting extra money in addition to debt inwards the economic scheme but inwards a way that does non trigger higher time to come surpluses, hence it does force upwards prices.
(Note: this post service has embedded figures in addition to mathjax equations. If the concluding paragraph is garbled or y'all don't come across graphs below, go here.)
That thought surfaced inwards many of the papers.
The morning time had several papers studying the gilded measure in addition to related historical arrangements. To a financial theorist the gilded measure is actually a financial commitment. No gilded measure has ever backed its banking concern complaint number 100%; in addition to none has fifty-fifty dreamed of backing its nominal authorities debt 100%. If a authorities had that much gold, in that location would last no indicate to borrowing.
So a gilded measure is a commitment to heighten taxes, or to borrow against credible time to come taxes, to acquire plenty gilded should it ever last needed. The gilded measure says, nosotros commit to pay off this debt at one, in addition to entirely one, cost level. If inflation gets big, people volition initiative off to desire to telephone substitution money for gold, in addition to we'll heighten taxes. If inflation gets also low, people wills tart to telephone substitution gilded for money, in addition to we'll impress it upwards every bit needed. Usually, inwards the financial theory,
\[ \frac{B_{t-1}}{P_t} = E_t \sum_{j=0}^{\infty} \beta^j s_{t+j}\]
the expectation of time to come surpluses is a combat nebulous, hence inflation powerfulness wander roughly a lot similar stock prices. The gilded measure is a way to commit to exactly the correct path of surpluses that stabilize the cost level.
Influenza A virus subtype H5N1 summary, with apologies inwards advance to authors whose points I missed or misunderstood:
Part I: History
George Hall presented his move with Tom Sargent on the history of U.S. debt limits, together with a fantastic novel information assault U.S. debt that volition last real useful going forward.
 |
| Price of a Chariot Horse: 100,000 Denarii |
Michael Bordo in addition to Arunima Sinha presented an analysis of suspensions of convertibility: Governments temporarily abandon the gilded measure during war, hence become dorsum at parity afterward. Maybe. By going dorsum afterward, people are willing to manage a lot of unbacked debt in addition to currency during the war. But sometimes the financial resources to become dorsum afterward are tough to get, the benefits of establishing credibility hence y'all tin borrow inwards the side past times side state of war seem farther off. When people are unsure whether the province volition become back, the wartime inflation is worse, in addition to the cost of going dorsum on parity are heavier. They analyze French Republic vs. Britain after WWI.
Martin Kleim took us on a tour of a large inflation inwards a previous European currency union, the Holy Roman Empire inwards the early on 1600s. Europe has had currency marriage ceremony without financial marriage ceremony for a long time, nether diverse metallic element standards in addition to coinages. In this illustration little states, nether financial pull per unit of measurement area from the thirty years' war, started to debase little coins, leading to a large inflation. It ended with an understanding to become dorsum to parity, with the states absorbing the losses. (In my equation, they needed a lot of surpluses to tally \(P\) with \(P^\ast\)). We had an interesting give-and-take on exactly where those funds came from. Disinflation is ever in addition to everywhere a financial reform.
Margaret Jacobson presented her move with Eric Leeper in addition to Bruce Preston on the terminate of the gilded measure inwards the U.S. inwards the 1930s. (Eric modestly stated his contribution to the newspaper every bit finding the matlab color code for gold, every bit shown inwards the graph.) Margaret in addition to Eric translate the financial statements of the Roosevelt Administration to say that they would run unbacked deficits until the cost grade returned to its previous level, the \(P^\ast\) inwards my higher upwards equation. Much give-and-take followed on how governments today, if they actually desire inflation, could accomplish something similar.
Part II Monetary Policy
Chris Sims took on that number directly. If y'all desire inflation, exactly running large deficits powerfulness non help. Hundreds of years inwards which governments built upwards hard-won reputations that when they borrow money, they pay it off, are difficult to upend immediately. Even if y'all desire to intermission that expectation -- all our governments accept mixed promises of stimulus at nowadays with deficit reduction later. A devaluation would help, but nosotros don't accept a gilded measure against which to devalue, in addition to non everyone tin devalue relative to each other's currency.
Chris' bottom describe of piece of occupation is a lot similar Margaret in addition to Eric's, in addition to my financial Taylor rule,
Coordinating financial in addition to monetary policy hence that both are explicitly contingent on reaching an inflation target — non entirely involvement rates low, but no taxation increases or spending cuts until inflation rises.But,
• This powerfulness move because it would stand upwards for such a shift inwards political economic scheme that people would rethink their inflation expectations.Chris led a long give-and-take including thoughts on rational expectations -- it's a stretch to impose rational expectations on policies that accept never been tried earlier (though our history lesson reminded us exactly how few really novel policies in that location are!)
Steve Williamson followed with a thoughtful model total of surprising results. The stock of money does non matter, but fed transfers to the treasury do. (I hope I got that right!)
My presentation (slides also here on my webpage) took on the "agenda" question. The basic financial equation is
\[\frac{B_{t-1}}{P_t} = E_t \sum M_{t,t+j} s_{t+j} \]
For the projection of matching history, data, analyzing policy in addition to finding amend regimes, I opined nosotros accept spent also much fourth dimension on the \(s\) financial part, in addition to non nearly plenty fourth dimension on the \(M\) discount charge per unit of measurement part, or the \(B\) part, which I map to monetary policy.
I argued that inwards monastic enjoin to sympathise the cyclical variation of inflation -- inwards recessions inflation declines piece \(B\) is rising in addition to \(s\) is declining -- nosotros postulate to focus on discount charge per unit of measurement variation. More generally, changes inwards the value of authorities debt due to involvement charge per unit of measurement variation are plausibly much bigger than changes inwards expected surpluses. As involvement rates rise, authorities debt volition last worth a lot less, an additionan inflationary pull per unit of measurement area that is frequently overlooked.
Then I presented brusk versions of recent papers analyzing monetary policy inwards the financial theory of the cost level. Interest charge per unit of measurement targets with no alter inwards surpluses tin create upwards one's hear expected inflation, but the neo-Fisherian conundrum remains.
Harald Uhlig presented a skeptical view, provoking much discussion. Some principal points: large debt in addition to deficits are non associated with inflation, in addition to M2 demand is stable.
I found Harald's critique quite useful. Even if y'all don't manage with something, knowing that this is how a actually sudden in addition to good informed macroeconomist perceives the issues is a vital lesson. I answered somewhat impertinently that nosotros addressed these issues fifteen years ago: High debt comes with large expected surpluses, exactly every bit inwards financing a war, because governments desire to borrow without creating inflation. The stability of M2 velocity does non isolate displace in addition to effect. The chocolate/GDP ratio is stable too, but eating to a greater extent than chocolate volition non increment GDP.
But Harald knows this, in addition to his overall indicate resonates: You guys postulate to uncovering something similar MV=PY that easily organizes historical events. The obvious graph doesn't work. Irving Fisher came upwards with MV=PY, but it took Friedman in addition to Schwartz using it to brand the thought come upwards alive. That is the role of the whole conference.
Francesco Bianchi presented his move with Leonardo Melosi on the Great Recession. New Keynesian models typically predict huge deflation at the naught bound. Why didn't this happen? They specify a model with shifting financial vs money dominant regimes. The measure model specifies that in ane lawsuit nosotros exit the naught saltation nosotros become correct dorsum to a money-dominant, Taylor-rule regime with passive financial policy. However, if in that location is a risk of going dorsum to a fiscal-dominant regime for a while, that changes expectations of inflation at the terminate of the naught bound. Even little changes inwards those expectations accept large effects on inflation during the naught saltation (Shameless plug for the New Keynesian Liquidity Trap which explains this indicate real simply.) So, every bit y'all come across inwards the graph above, the "benchmark" model which includes a probability of reverting to a financial regime after the naught bound, produces the mild recession in addition to disinflation nosotros accept seen, compared to the measure model prediction of a huge depression.
Fiscal policy is political of course. Campbell Leith presented, alongside other things, an intriguing tour of how political scientists shout out upwards nearly political determinants of debt in addition to deficits. My snarky quip, nosotros learned with peachy precision that political scientists don't know a heck of a lot to a greater extent than than nosotros do! But if so, that is also wisdom.
Part III International
 |
red describe of piece of occupation regime switching probability of 30%, blueish describe of piece of occupation 0 % |
Alexander Kriwoluzky presented thoughts on a financial theory of telephone substitution rates, applying it to the U.S. vs. Germany, the abandonment of the gilded measure in addition to switch to floating rates inwards the early on 1970s. An telephone substitution charge per unit of measurement peg way that FRG must import U.S. financial policy every bit well, importing the deficits that back upwards to a greater extent than inflation. FRG didn't desire to make that. People knew that, hence a shift to floating rates was inwards the air. Expectations of that shift tin explicate the involvement differential in addition to apparent failure of uncovered involvement parity.
Last but sure non least, Bartosz Maćkowiak presented a thoughtful analysis of "Monetary-Fiscal Interactions in addition to the Euro Area’s Malaise" articulation move with Marek Jarosińsky.
Echoing the financial Taylor dominion thought running through hence many talks, they advise a financial rule
\[ S_{n,t} = \Psi_n + \Psi_B \left( B_{n,t-1} - \sum_n \theta_n B_{n,t-1} \right) + \psi_n (Y_{n,t}-Y_n) \]
In words, each country's surplus must react to that country's debt \(B_n\), but total European Union surpluses make non react to total European Union debt. In this way, the European Union is "Ricardian" or "fiscal passive" for each country, but it is "non-Ricardian" or "fiscal active" for the European Union every bit a whole. In their simulations, this financial commitment has the same beneficial effects running through Leeper in addition to Jabcobson, Bianchi in addition to Melosi, Sims, in addition to others -- but maintaining the thought that private countries pay their debts.
Influenza A virus subtype H5N1 large thank y'all to the Harris School in addition to the Becker-Friedman Institute who sponsored the conference.
