tag:blogger.com,1999:blog-2499715909956774229.post6309302558511697229..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: PK FrothsStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-2499715909956774229.post-47039518040809692882010-08-26T10:50:59.225-07:002010-08-26T10:50:59.225-07:001. Your argument is about the path of inflation in...1. Your argument is about the path of inflation in the future, so the value of dInflation/dt belongs in the conclusion of your argument, not in its assumptions.<br />2. I believe it does come from Wicksell. I think it'll also come out of any model in which monetary policy has real effects. In the simple model you've given, the real interest rate is fixed, so I don't see how monetary policy affects the real economy. You don't like sticky prices, so my usual explanation of how that happens won't convince you. What model do you usually use to explain how the Fed affects the real economy?<br />3. It must be. I didn't remember where I'd seen it.Jeffrey Yasskinhttps://www.blogger.com/profile/07441481987954238849noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-5105504370598431702010-08-26T06:53:08.832-07:002010-08-26T06:53:08.832-07:001. I'm always thinking dynamically. Constant i...1. I'm always thinking dynamically. Constant inflation is just an example for the sake of argument.<br />2. "If inflation need not be constant, and the fed sets a nominal interest rate so the real rate is below the natural rate, then inflation will accelerate upwards. There won't be a steady state for you to solve for." This sounds like Wicksell, which never made any sense to me. You have to write down a serious model to explain that one.<br />3. The stuff about the pole is from Nick Rowe, right? Again, write down the model; the analogy doesn't help me.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-17645267375477893772010-08-26T03:05:06.815-07:002010-08-26T03:05:06.815-07:00You need a dynamic model, not a static one. It'...You need a dynamic model, not a static one. It's true that if interest rates are low, and inflation is constant, then inflation must be low. But why are you assuming that inflation must be constant?<br /><br />If inflation need not be constant, and the fed sets a nominal interest rate so the real rate is below the natural rate, then inflation will accelerate upwards. There won't be a steady state for you to solve for.<br /><br />Someone analogized this to balancing a pole on one end. If you hold the bottom (the fed funds rate) at x=1, AND THE POLE DOESN'T FALL OVER, then the top (the inflation rate) must be at x=1. But if the top starts at x=1, and you insist on holding your hand at x=2, the top will accelerate to the left, not magically shift over to x=2. To increase the inflation rate and the fed funds rate in the long term, you must start by shifting the fed funds rate _down_.Jeffrey Yasskinhttps://www.blogger.com/profile/07441481987954238849noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-84745497158990882832010-08-25T21:53:15.350-07:002010-08-25T21:53:15.350-07:00Thanks for the post. What do you think of Scott S...Thanks for the post. What do you think of Scott Sumner's ideas on this subject?<br />E.g.:<br />http://www.themoneyillusion.com/?p=6605<br />http://www.themoneyillusion.com/?p=6616<br /><br />-GregAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-81376643593907272352010-08-25T19:01:08.201-07:002010-08-25T19:01:08.201-07:00Thanks for the reply, and the new post!Thanks for the reply, and the new post!Kostahttps://www.blogger.com/profile/07075138548460831841noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-11004823069099771192010-08-25T17:58:14.635-07:002010-08-25T17:58:14.635-07:00Of course. It's nothing more than Irving Fishe...Of course. It's nothing more than Irving Fisher at work. The Fisher relation holds in the long run, so if the central bank pegs the nominal interest rate at a sufficiently low rate forever, this must imply deflation. For example, suppose a cash-in-advance model with a rep. consumer, period utility u(c), discount factor b, constant aggregate endowment y. c is consumption. Then the real interest rate is constant at 1/b -1. Have the money stock grow at a constant rate m. Then the nominal interest rate is (1+m)/b - 1, and the inflation rate is m. Now make m sufficiently small. Q.E.D.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-75265316404357485882010-08-25T15:41:05.757-07:002010-08-25T15:41:05.757-07:00Harless's piece was an interesting read, but a...Harless's piece was an interesting read, but after going through it twice, I think he's got a good point.<br /><br />Nick Rowe also takes Kocherlakota to task http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/08/why-everyone-should-be-forced-to-take-intro-economics.html#more<br /><br />Nick particularly objects to Kocherlakota's claim that "To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation."<br /><br />I believe this was the claim that PK was objecting to. <br /><br />Do you agree with Kocherlakota's assertion that a low fed fund rate must lead to deflation?Kostahttps://www.blogger.com/profile/07075138548460831841noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-41689370771468998342010-08-25T14:29:49.810-07:002010-08-25T14:29:49.810-07:00Yes, that's a bizarre piece (I mean Harless...Yes, that's a bizarre piece (I mean Harless's) isn't it?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-2633017816554463762010-08-24T17:25:16.557-07:002010-08-24T17:25:16.557-07:00Andy Harless also has some harsh words for Kocherl...Andy Harless also has some harsh words for Kocherlakota:<br /><br />http://blog.andyharless.com/2010/08/do-umbrellas-cause-rain.htmlThe Money Demand Bloghttp://themoneydemand.blogspot.com/noreply@blogger.com