Has Steve Williamson been advising the Turkish Prime Minister?

Nicolas Goetzmann sent me this FT story:

Mr Erdogan’s own resistance to interest rate rises goes deep: on the flight, the prime minister insisted that, contrary to economic theory, increases in interest rates cause inflation.

“I believe that inflation and interest rates are not inversely proportional but in direct proportion,” he told the reporters. “In other words, the relationship between inflation and interest is cause and effect: the interest rate is the cause, inflation is the result. If you increase the rate, inflation increases. If you reduce it, both drop together. When you think they are inversely proportional you always get much more negative results.”



30 Responses to “Has Steve Williamson been advising the Turkish Prime Minister?”

  1. Gravatar of Steve Steve
    30. January 2014 at 09:07

    Off topic, but Obama said “JOBS” 23 times during his SOTU address.

    But Obama also said this:

    “Tonight, I ask more of America’s business leaders to follow John’s lead and do what you can to raise your employees’ wages.

    It seems that Obama wants higher nominal income growth. Unfortunately his intellectual advisers are obsessed with bubbles, inflation, and redistribution.


  2. Gravatar of Randomize Randomize
    30. January 2014 at 09:14

    Time to start a new charity where we send old Econ 101 textbooks to Turkey?

  3. Gravatar of benjamin cole benjamin cole
    30. January 2014 at 09:25

    Well…we have recent examples of USA economists who say it is an “established scientific fact” there is no connection between the money supply and economic output, or that QE causes deflation…so maybe higher interest rates raise costs thus raising inflaton in Turkey…it is a brave new world and all is possible…

  4. Gravatar of Matt Waters Matt Waters
    30. January 2014 at 09:50

    A WSJ editorial made this exact argument. I think the reasoning was that banks like to lend at higher interest rates and therefore more lending would take place and therefore higher demand. Of course, there happens to be a demand curve as well as supply curve. Many Keynesian arguments similarly forget the supply curve and the reason interest rates change demand is money supply.

  5. Gravatar of John Becker John Becker
    30. January 2014 at 10:01

    Great comment Randomize. However, I’m not sure that anything we can do could help someone who is that stupid.

    By the way, I wonder how much poverty exists in the world because of the basic economic illiteracy of the people in charge. I think economic illiteracy is an even worse problem in poor democracies because the people have a voice; and that voice is almost always wrong. Look at South America for examples.

  6. Gravatar of Dilip Dilip
    30. January 2014 at 10:06

    India did the same thing a few days ago when Governor Raghuram Rajan hiked the repo rate to 8% surprising every economic commentator out there. His overarching desire was to curb the CPI inflation. I am no economist, so I don’t really know if there is a cause-and-effect picture involved here but that is what a layman is going to understand.

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. January 2014 at 10:25

    Maybe it’s written in the Koran.

  8. Gravatar of Scott Sumner Scott Sumner
    30. January 2014 at 10:44

    Steve, Of course for any given NGDP, higher wages mean fewer jobs.

    Patrick, Doesn’t the Koran ban interest entirely? Unless done in some for of profit sharing?

  9. Gravatar of Doug M Doug M
    30. January 2014 at 10:44

    You have said it here…high rates are associated with easy money.

  10. Gravatar of The Market Fiscalist The Market Fiscalist
    30. January 2014 at 10:49

    If the natural rate is 2% and you have 0% inflation and you want to increase the nominal rate to 5% how else are going to maintain that rate but by increasing inflation to 3% ?

  11. Gravatar of Jerry Melsky Jerry Melsky
    30. January 2014 at 11:04

    OK, yes, sounds like Mr. Erdogan’s got it wrong. But, what about Nick Rowe saying this: “The central bank adjusts the nominal interest rate on electronic money to try to hit that target real interest rate on paper money.

    The central bank has a theory about the relationship between the nominal interest rate on electronic money and the real interest rate on paper money.

    According to that theory: if the central bank wants to lower the real interest rate on paper money (because it thinks there’s a danger the real interest rate on paper money will rise above target unless it does something) it needs to lower the nominal interest rate on electronic money. The central bank calls this the “short run” part of its theory.” and then this: “Very few people understand the central bank’s theory. Even some very good monetary economists don’t get the short run part, and think that if the central bank wants to lower the real interest rate on paper money, all it needs to do is raise the nominal interest rate on electronic money.” http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/01/another-weird-monetary-world.html#more

    Well, Tell you one thing. I’M confused.

  12. Gravatar of Randomize Randomize
    30. January 2014 at 11:38

    John Becker,

    Hopefully the spread of the internet will bring information to a lot of these countries. A friend of mine recently returned from a Peace Corps tour in rural Rwanda where they are just now getting access to cellular internet. The local farmers have no idea how to go about butchering cows and wind up selling generic chunks of beef rather than different value-added steak cuts. My friend, having grown up on a farm, was able to help them pick out a few of the choice cuts and pointed them toward Googling charts on the matter at the new library he was involved in opening. Just imagine all the other industries operating with a similar lack of instructions that could grow exponentially with access to the internet.

  13. Gravatar of TravisV TravisV
    30. January 2014 at 12:42

    Benjamin Cole,

    See here: http://econlog.econlib.org/archives/2014/01/heres_larry_sum.html

    On January 5, 2014, Larry Summers said that we have had “extraordinarily easy monetary policies.”

    The market reaction when Summers gave up his Fed campaign and its reaction to Yellen’s appointment was very positive.

    I trust the market’s judgment over yours.

  14. Gravatar of James in London James in London
    30. January 2014 at 16:26

    He may be many things Edogan but he is no fool when it comes to economic management. He drove inflation down by elimininating the fiscal deficit in 2002, and driving rates down. He’d been Mayor of Istanbul prior to becoming PM and observed massive economic mismanagement, often seeing rates rise above 50% and inflation go higher. He may, or may not, have become a corrupt third term leader, but his macro economic instincts remain sounder than most central bankers. Am sure Benjamin Cole would see his good side.

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. January 2014 at 16:32

    On a related note…

    I’ve done Granger causality tests on the US monetary base (i.e. QE) over the period since December 2008 and find that the monetary base Granger causes the real broad dollar index, the S&P 500, the DJIA, commercial bank loans and leases, the PCEPI, and 5-year inflation expectations as measured by TIPS. None of this should be terribly surprising from the standpoint of standard textbook monetary economics.

    I’ve also run such tests with respect to a variety of investment asset classes based on the claims of numerous financial analysts. I find that the monetary base Granger causes high-yield bonds, global equities, 3-month CD yields and 10-year T-Notes yields. The impulse response results show that QE significantly increases high-yield bonds (reduces yield), increases global equities, reduces 3-month CD yields and decreases 10-year T-Notes (increases yield).

    Of these, only the T-Note yield result is the opposite of what most financial analysts tell their clients, although this is entirely consistent with what standard textbook monetary economics predicts via term structure theory. The fact that US QE increases global equities is mostly attributable to the simple fact that US equities are a significant share of global equities.

    But there are lots (and lots) of things that the US monetary base does not Granger cause over the period since December 2008 that most financial analysts nevertheless insist QE has an effect on. In particular the monetary base does not Granger cause the price of gold, copper or crude oil, the Japanese Nikkei 225 index or emerging market equities.

    Thus all of the turmoil being experienced in the emerging markets right now (including Turkey) very likely has very little to do with what the FOMC has been deciding to do in the confines of the Eccles Building in Washington DC.

  16. Gravatar of benjamin cole benjamin cole
    30. January 2014 at 16:54

    Mark S–
    David Beckworth says the Fed is a super central bank as the dollar is the major reserve currency (and I add, many nations peg currencies to dollar, such as Thailand).
    In short Fed policies have global ramifications.

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. January 2014 at 17:25

    benjamin cole,
    I wrote the above comment partly in response to David’s post and left it there first.

    Yes, the Fed is still by far the most important central bank on earth (at least until the PBOC surpasses it) and what it does has global ramifications. However, that being said, there’s zero empirical evidence that the US QE has had any effect at all on emerging market equities.

    If the emerging markets implode they have nobody to blame but themselves. Their central banks should be focused on stabilizing their nominal incomes and not defending their exchange rates.

  18. Gravatar of TravisV TravisV
    30. January 2014 at 18:54

    PCE inflation rate lowest since 2009


  19. Gravatar of TravisV TravisV
    30. January 2014 at 19:01

    Could that low PCE inflation rate explain why the stock market rose 1.13% today?

  20. Gravatar of John Becker John Becker
    30. January 2014 at 21:53

    High interest rates are a sign that money has been loose in the past but it doesn’t mean that money is loose now. If you are hiking rates high enough to bring down inflation from say 10% to 2%, that isn’t loose money. In fact, most people will perceive that as very tight money since lending will go way down and many businesses will fail and a pretty hard recession will usually hit.


    The problem is that on the stuff that economists can actually agree on, the people aren’t willing to believe what they say. On stuff that is highly controversial and unknown, there is a good chance that the economists will run the show. This makes the whole profession look bad and causes a downward spiral of economic ignorance.

  21. Gravatar of Benjamin Cole Benjamin Cole
    31. January 2014 at 03:28

    Mark S-

    I concur that emerging markets (and any nation) should run aggressive, pro-growth monetary polices (while doing what they can to boost the supply side).

    But…take Thailand. For better or worse, it pegs the baht around 30-33 to the dollar.

    It just makes sense when the US prints money, then the Thais have to print along with it. And indeed, the Thai set (stock market) has rallied since 2008.

    It seems to me that monetary expansionism in the US must lead to monetary expansion elsewhere…this may not lead to equity performance in a way that can be measured, given so many national idiosyncrasies also at play.

    For example, you get a coup in Thailand while the Fed is expanding…the coup unsettles the Thai stock market…it looks like Fed expansionism tanked the Thai set….

    Well, that’s my blabber for the day…

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    31. January 2014 at 06:15

    Benjamin Cole,
    I did my analysis on the Morgan Stanley Capital International (MSCI) Standard (Large + Mid Cap) Emerging Market Index:


    This index includes 21 countries accounting for about 30.8% of global NGDP in 2012 according to the IMF.

    The IMF classifies the exchange rate arrangements of these same countries as “free floating” or “floating” with only four exceptions: 1) China, 2) Russia, 3) Malaysia and 4) Egypt. (Thailand is classified as a floating inflation targeter.)


    China is classified as having a “crawling arrangement” with the US dollar as its de facto exchange rate anchor. Russia and Malaysia are both classified as having “managed arrangements” with no explicit nominal anchor. Egypt is classified as having a “stabilized arrangement” with a composite exchange rate anchor.

    So, of these countries, only China and Egypt have exchange rate anchors, but Egypt only represents about 1.2% of the NGDP of these 21 nations, and it’s not even clear how large a weight the US dollar has in Egypt’s composite anchor. So we’re really only talking about China.

    Does the US monetary base Granger cause Chinese equities? I don’t know because I haven’t checked yet. But China is about 36.9% of the NGDP of these 21 countries, so if the US monetary base doesn’t Granger cause emerging market equities as a whole, I rather doubt it has any effect on Chinese equities by themselves.

  23. Gravatar of benjamin cole benjamin cole
    31. January 2014 at 12:58

    Thailand may be improperly classified…for the last 10 years the baht has been at 30 to the dollar..if that sucker ain’t pegged…

  24. Gravatar of ssumner ssumner
    31. January 2014 at 13:50

    Everyone, Don’t read too much into this:

    1. Rates and inflation are positively correlated.

    2. Most economists think the causation goes from inflation to rates. And that raising rates lowers inflation.

    3. Williamson seems to dissent from that orthodox view.

    That’s all.

  25. Gravatar of Mikio Mikio
    31. January 2014 at 19:33

    Dear Scott, what do you think of this “shadow rate” thing? These economists claim the December taper resulted in reducing the US shadow rate to nearly -2%.

    A comment would be greatly appreciated.


  26. Gravatar of ssumner ssumner
    1. February 2014 at 11:57

    Mikio, I don’t think interest rates tell us anything important about monetary policy. Actual or shadow rates.

  27. Gravatar of DeusDJ DeusDJ
    1. February 2014 at 17:10

    Just FYI, the Turkish finance minister’s economics is (in)formed by mostly one person: Warren Mosler. That should help you understand where this viewpoint is coming from, to some extent.

  28. Gravatar of ssumner ssumner
    2. February 2014 at 11:55

    DeusDJ, Link?

  29. Gravatar of Mark A. Sadowski Mark A. Sadowski
    2. February 2014 at 12:17


    See this:


    Which leads to this:


    Moslernomics (MMT) in action?

  30. Gravatar of ssumner ssumner
    3. February 2014 at 12:22

    Thanks Mark.

Leave a Reply