I did an interview amongst Cloud Yip at Econreporter, Part I as well as Part II, on diverse things macro, money, as well as financial theory of the toll level. It's business office of an interesting series on macroeconomics. Being a transcript of an interview, it's non equally build clean equally a written essay, but non equally incoherent equally I unremarkably am when talking.
On the same topics, I volition last giving a utter at the European Financial Association, on Friday, titled "Michelson-Morley, Occam as well as Fisher: The radical implications of stable inflation at the nix bound," slides here. (Yes, it's an development of before talks, as well as hopefully it volition last a newspaper inward the fall.)
And, also on the same topic, you lot mightiness honour useful a fix of slides for a 1.5 sixty minutes MBA cast roofing all of monetary economic science from Friedman to Sargent-Wallace to Taylor to Woodford to FTPL. That likewise should instruct written downwards at closed to point.
The utter incorporates something I only figured out final week, namely how Sims' "stepping on a rake" model produces a temporary reject inward inflation afterwards an involvement charge per unit of measurement rise. Details here. The primal is unproblematic financial theory of the toll 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 unproblematic example.
Contrast a perpetuity amongst i menstruation debt, as well as a frictionless model. Frictionless way constant existent rates as well as inflation moves i for i amongst 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 = acquaint 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 publish of bonds outstanding, as well as second are existent main surpluses. For i menstruation debt Q=1 always. (If you lot don't come across equations to a higher house or moving painting below, come upward dorsum to the master copy here.)
Now, suppose the Fed raises involvement rates, unexpectedly, from \(i\) to \(i^\ast\), as well as (really important) at that topographic point is no modify to financial policy \(s\). Inflation \(P_{t+1}/P_t\) must jump instantly upward next the Fisher relation. But the toll marking \(P_t\)might jump too.
With i menstruation debt, that can't locomote on -- B is predetermined, the correct side doesn't change, hence \(P_t\) can't change. We only ramp upward to to a greater extent than inflation.
But amongst long-term debt, whatever modify inward the bond toll Q must last reflected inward a jump inward the toll marking P. In the example, the toll of the perpetuity falls to
$$ Q_t = \sum_{j=1}^\infty \frac{1}{(1+i^\ast)^j} = \frac{1+i\ast}{i^\ast}$$
hence 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 toll marking jumps downwards 20%. The viscid toll version smooths this out as well as gives us a temporary disinflation, but as well as hence a long run Fisher ascent 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, hence all the Fed tin hit is rearrange the toll marking over time.
But it tells us this is the of import query -- the dynamics of inflation next an involvement charge per unit of measurement ascent depend crucially on how nosotros recall financial policy adjusts. That's a vastly unlike focus than nearly of monetary economics. That we're looking nether the incorrect couch is big intelligence 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 instance of adjusting the temperature inward the shower, rather than fiddle amongst the knobs it mightiness last amend to only fix it where you lot desire it as well as wait.
On the same topics, I volition last giving a utter at the European Financial Association, on Friday, titled "Michelson-Morley, Occam as well as Fisher: The radical implications of stable inflation at the nix bound," slides here. (Yes, it's an development of before talks, as well as hopefully it volition last a newspaper inward the fall.)
And, also on the same topic, you lot mightiness honour useful a fix of slides for a 1.5 sixty minutes MBA cast roofing all of monetary economic science from Friedman to Sargent-Wallace to Taylor to Woodford to FTPL. That likewise should instruct written downwards at closed to point.
The utter incorporates something I only figured out final week, namely how Sims' "stepping on a rake" model produces a temporary reject inward inflation afterwards an involvement charge per unit of measurement rise. Details here. The primal is unproblematic financial theory of the toll 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 unproblematic example.
Contrast a perpetuity amongst i menstruation debt, as well as a frictionless model. Frictionless way constant existent rates as well as inflation moves i for i amongst 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 = acquaint 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 publish of bonds outstanding, as well as second are existent main surpluses. For i menstruation debt Q=1 always. (If you lot don't come across equations to a higher house or moving painting below, come upward dorsum to the master copy here.)
Now, suppose the Fed raises involvement rates, unexpectedly, from \(i\) to \(i^\ast\), as well as (really important) at that topographic point is no modify to financial policy \(s\). Inflation \(P_{t+1}/P_t\) must jump instantly upward next the Fisher relation. But the toll marking \(P_t\)might jump too.
With i menstruation debt, that can't locomote on -- B is predetermined, the correct side doesn't change, hence \(P_t\) can't change. We only ramp upward to to a greater extent than inflation.
But amongst long-term debt, whatever modify inward the bond toll Q must last reflected inward a jump inward the toll marking P. In the example, the toll of the perpetuity falls to
$$ Q_t = \sum_{j=1}^\infty \frac{1}{(1+i^\ast)^j} = \frac{1+i\ast}{i^\ast}$$
hence 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 toll marking jumps downwards 20%. The viscid toll version smooths this out as well as gives us a temporary disinflation, but as well as hence a long run Fisher ascent 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, hence all the Fed tin hit is rearrange the toll marking over time.
But it tells us this is the of import query -- the dynamics of inflation next an involvement charge per unit of measurement ascent depend crucially on how nosotros recall financial policy adjusts. That's a vastly unlike focus than nearly of monetary economics. That we're looking nether the incorrect couch is big intelligence 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 instance of adjusting the temperature inward the shower, rather than fiddle amongst the knobs it mightiness last amend to only fix it where you lot desire it as well as wait.
