Krugman on Sims
Bob Murphy directed me to a very interesting post where Paul Krugman discusses a recent paper by Christopher Sims (on the fiscal theory of the price level.)
Here’s Sims on fiscal policy:
Fiscal expansion can replace ineffective monetary policy at the zero lower bound, but fiscal expansion is not the same thing as deficit finance. It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts.
I think he’s saying that fiscal expansion works only if it leads to a rise in expected inflation. Or maybe not – the truth is that I’m not sure, which is one problem with too purely verbal an argument. But it’s certainly something I’ve heard from helicopter money types, who warn that something like Ricardian equivalence will undermine fiscal expansion unless it’s money-financed.
But this is a misunderstanding of Ricardian equivalence, on two levels. First, as I’ve tried repeatedly to explain, a TEMPORARY increase in government purchases of goods and services will NOT be offset by expectations of future taxes even if full Ricardian equivalence holds. The kind of argument people like Robert Lucas made sounded Ricardian, but wasn’t – it was Ricardianoid.
Second, less relevant to Sims but very relevant to other helicopter people, a deficit ultimately financed by inflation is just as much of a burden on households as one ultimately financed by ordinary taxes, because inflation is a kind of tax on money holders. From a Ricardian point of view, there’s no difference.
So I’m trying to figure out exactly what Sims is saying. What, ahem, is his model? The little liquidity-trap model I devised way back in 1998 is forward-looking, does implicitly incorporate the government budget constraint, but doesn’t tell anything like Sims’s story. What is he doing differently, exactly? I’m confused – and I hope it’s not because I’m stupid.
Krugman’s obviously not stupid, and for the fiscal models of the sort discussed here he has better intuition than I do. So this post will probably be wrong. But I’ll give it my best shot.
Let’s start here:
I think he’s saying that fiscal expansion works only if it leads to a rise in expected inflation.
That seems like an odd way of putting it. Any (demand-side) policy that is expected to be successful should lead to a rise in expected inflation, as long as the SRAS curve is not 100% flat (and it is not.) And in any rational expectations model, a policy will only be successful if it’s expected to be successful. I think Krugman might have gotten on the wrong track by trying to frame this issue in Ricardian equivalence terms.
The quoted statement by Sims actually reminds me of Krugman’s 1998 paper, which says that currency injections are only effective if expected to be permanent—where permanent is defined as at least long enough to hold up until you are back in a monetarist world with positive interest rates. If the currency injections are expected to be permanent, then they are expected to lead to future inflation. That lowers real interest rates today (in the NK model) and boosts AD (NGDP) today. Working backwards, a policy not expected to lead to future inflation is not expected to be effective.
Krugman’s right that inflation is a tax, but I think he relies too much on Keynesian reasoning in discussing the implication of that fact. Consider Zimbabwe, which was hit back in 2008 by a massive inflation tax. Certainly that hurt consumers badly, but nonetheless nominal consumer spending soared under the Zimbabwe government’s reckless policies. Yes, it was all nominal growth, but that reflected the poor supply side characteristics of the Zimbabwe economy. The AD curve was shifting rapidly to the right, so demand stimulus was “working” in that sense. But it had nothing to do with consumers spending more because they felt richer. They spent more because money was rapidly losing value
From a (market) monetarist perspective, the effectiveness of any demand-side policy depends heavily on the future expected path of policy. Krugman and I agree that this is true of money, and everyone agrees that it is true of tax-oriented fiscal policy if you assume Ricardian equivalence. The interesting question is what if you do not assume Ricardian equivalence? Or what if the fiscal policy is more G, where G is output that is not a perfect substitute for C or I?
And that’s where my intuition tells me that Krugman is right, although personally I doubt the effect is very large. In terms of the monetarist’s equation of exchange, I doubt whether G alone has much impact on V. However if G is financed by a permanent increase in the money supply, it has a huge impact on M*V. Even a credible future increase in M would by itself boost V far more than a sizable (current or future) increase in G.
Krugman’s 1998 paper can be generalized to show that any temporary change in M or V is ineffective at the zero bound. I.e. that current M*V is strongly impacted by changes in expected future M*V. In that case a temporary fiscal expansion probably has very little impact on demand. On the other hand, in standard NK models it can still boost output, even if NGDP does not rise, as an increase in G will reduce C, and the newly impoverished workers will offer more labor, increasing aggregate supply—or something like that.
But Keynesians usually focus on the impact on fiscal policy on AD, and in that case I am inclined to support Sims’s claim that a policy not expected to boost inflation is also not likely to be effective.
That’s not to say I’m a fan of the fiscal theory of the price level; I don’t think it’s a useful theory for the US, although it obviously is for countries like Zimbabwe.
PS. Krugman also says this:
Just to be clear, I’m all for fiscal expansion under whatever excuse. I’m even reluctant to question arguments for helicopter money, lest my intellectual skepticism give ammunition to those still possessed by austerian instincts.
I’m not at all reluctant to question arguments for helicopter money, as I do not worry at all about empowering people with austerian instincts. So if you want to know what Krugman privately believes about helicopter money, read my posts showing why it did not work in Japan.
PPS. On Wednesday September 7th, I will be presenting a paper at a joint Mercatus-Cato conference on monetary policy rules. The conference will be livestreamed at mercatus.org/live.
Tags:
4. September 2016 at 08:37
The question is if the debt purchases by the BOJ are going to be permanent. Helicopter money by definition requires them to be permanent. They are purchased at a zero interest rate, which would be a gift to the government, reducing the debt.
It should work, if the government passes it on to the real economy. Guess that didn’t happen. And was the debt converted to perpetual zero interest bonds?
4. September 2016 at 11:41
Re: I think he’s saying that fiscal expansion works only if it leads to a rise in expected inflation.
Is that another way of saying “as long as there is no monetary offset”?
4. September 2016 at 15:36
I’ve read Krugman’s post and this post a couple of times and still have trouble making heads or tails of it. The conclusion I’ve reached is the assumptions of Ricardian equivalence just do not match any real-world experience. Americans, particularly the ones with de facto control of discretionary investment dollars, do not think in such precise terms.
Ricardian equivalence has particularly wrong assumptions because most investment managers look to maximize assets under management rather than dispassionately choosing between Consumption and Investment. This behavior is rational for the managers’ PERSONAL incentives. An investment manager which says “The government has run surpluses recently. Therefore, go ahead and spend the money now instead of saving it for future taxes.” simply doesn’t exist.
Investment managers could be overruled by their clients. But as Krugman pointed out, average Americans are extremely ill-informed of what the government spends money on or the size of the deficit. The people with ultimate legal control of discretionary investment can be irrational to the point where irrationalities become predictable patterns.
– The Equity Premium Puzzle.
– Too much active management and transaction costs.
– When investments are actively managed, value stocks consistently do better across time period or different stock markets.
I don’t want to say “economic model assumptions have all these issues and therefore why even try?” The discussions of either Ricardian equivalence, DSGE or IS/LM just get far too detached from on-the-ground realities.
The Krugman model of permanent monetary base increases has much more validity, but it’s interesting how central bank action lead to reality in the case of QE2. In early 2011, PIMCO had so much AUM that they almost WERE the bond market. Bill Gross took the QE2 announcement and then made a bunch of faulty conclusions where he assumed inflation must be impending.
http://money.cnn.com/2011/06/08/markets/bill_gross_pimco_morningstar/
What’s important is Gross did NOT have an expectations-based argument in response to a Krugman liquidity trap argument. He assumed the 2011 Fed money-printing would directly cause inflation. But QE has little effect DIRECTLY.
At the end of the article though, it showed how this irrational belief translated to actual change. Soros called this phenomenon “reflexivity,” where irrational investor behavior changes fundamental underlying values. In this case, Gross’ irrationality led to real increases in NGDP, as shown by the end of the article:
“‘Treasuries are only half of the bond market,’ Gross said. ‘Look in countries where monetary policies are less repressive.’
He said that Brazilian debt offers real interested rates between 6% and 7%, and Canada, Mexico and Germany also offer better deals on their bonds.”
This turned out to be a very poor decision. Shorting the US Treasury market lost a lot of money because of the fundamentals of the natural rate and low inflation. But the irrational decisions of Gross and other investors actually did increase NGDP and spending. Actual investor money in 2011 purchased more foreign bonds which decreased the value of the dollar.
The experience of 2011 was a vindication, sort of, of expectations-based arguments. But it also may not be repeatable, as more regular bond market investors know of things such as the natural rate. The evidence in 2011 indicates it depended much on irrationality and misunderstanding of the mechanisms of QE2. Going forward, I still think credible mechanisms below the zero-bound are needed. Should the Fed not have legal or political authority for these credible mechanisms, then the Fed needs to depend on either fiscal policy or market irrationality.
4. September 2016 at 16:22
bill. It’s more like saying it only works if it works.
Matthew, Better yet, let’s just avoid the zero bound.
4. September 2016 at 16:57
So if you want to know what Krugman privately believes about helicopter money, read my posts showing why it did not work in Japan.–Scott Sumner.
I think the helicopter drops of Finance Minister Takahashi Korekiyo did work, one reason Japan largely sidestepped the Great Depression. This seems to be a consensus view, even if usually ignored.
Not sure when you addressed this issue.
4. September 2016 at 16:59
Krugman is possessed by government spending instincts.
4. September 2016 at 17:04
I agree with Matthew Waters about the unrealistic assumptions involved with Ricardian equivalence. It is one of the reasons that Paul Krugman’s post was disappointing to me. And I know Professor Sumner has said that he does think the Ricardian equivalence idea has validity, but is there really good evidence that many people actually behave this way? At the least, it seems completely different from how I would expect people I am familiar with to act. Including myself.
4. September 2016 at 17:17
Jerry, I don’t mean to suggest RE works perfectly, that’s unrealistic. But do many people think this way? I am pretty sure they do.
I sometimes used to ask my class to raise their hands if they didn’t expect to get their promised Social Security benefits when they retired. Most hands went up. Then I asked them whether this concern might cause them to save more for their retirement, out of fear for the future of Social Security. Again, most hands went up.
That’s all I meant. When the fiscal situation gets worse, people save more.
Ben, I was talking about the far bigger drops in the 1990s and 2000s
4. September 2016 at 18:17
Avoiding the zero-bound is one of the best reasons for a higher inflation target in “normal” times. Alternatively, have a higher NGDP target. Whichever has more margin of error to keep the natural rate above zero.
The bank failures, or possibility of bank failures, were also tied to the collapse of the natural rate in 2008. Tighter policy in NGDP terms before Sep. 2008 had some small role in the bank failures, but especially Bear Stearns and AIG looked insolvent under any reasonable NGDP growth path.
Ideally, monetary policy shouldn’t be reliant on bailing out non-commercial banks or private companies. Concrete steppes below the zero-bound would allow NGDP growth to be assured regardless of significant drops in the natural rate. Or the concrete steppes keep bank failures from happening in solvent banks without bailouts.
It was also interesting to me how Bill Gross’ strategies played into the Krugman model of expectations of future inflation. The Krugman model played out…sort of. It wasn’t exactly as drawn up with rational agents though.
4. September 2016 at 20:51
Well sure, its reasonable for 20 year olds to wonder if a program like Social Security will be the same 45 or 47 years later when they might be eligible to collect on it. Not that college students typically have accrued much in the way of promised benefits at that point anyways. But I see your point, I hadn’t considered that the Ricardian equivalence idea would apply to payouts of promised future benefits from government programs. My understanding was always that current spending would fall due to increased savings due to expectations of future taxes in response to current budget deficits. Which still seems mostly, (but not completely), whacky to me.
BTW, I fully expect to receive social security in another 13 to 18 years if I am still around. There is no other government program that I have more confidence will be there than social security.
4. September 2016 at 22:23
Japan never converted the bonds to perpetual zero interest bonds. Therefore, helicopter money did not happen in Japan and Sumner is saying helicopter money failed when it really didn’t even happen:
http://ftalphaville.ft.com/2016/07/14/2169712/the-perpetual-jgb-cometh/
You can believe prof. I believe the FT.
4. September 2016 at 22:30
I wish we could make MP rules by GitHub
4. September 2016 at 23:22
Scott:
On Japan, are you saying the 1990s-2000s QE is the same as helicopter drops?
I thought it was your position QE is not the same as helicopter drop.
And were the 1990s-present Bank of Japan QE efforts larger in relation to Japan GDP?
Were the recent Fed QE efforts helicopter drops? I never heard you use that language.
.
5. September 2016 at 01:13
Krugman: “The deficits must be seen as financed by future inflation, not future taxes or spending cuts.” – given that money is neutral, you cannot ‘finance’ a deficit with inflation. That’s the biggest fallacy in this post.
+as Ben Cole says, it’s not clear Japan’s QE is the same as a helicopter drop. In a helicopter drop, you give money printed out of thin air to either a consumer or a government to spend. It is not the same as increasing base money to lend. (let’s leave aside neither plan will work to raise real GDP).
5. September 2016 at 02:53
Lol Ray, at least make your delusion about money neutrality internally consistent. Did you forget that if money is neutral, printing money still (and can only) cause inflation? Or did you not realise that, hmmm…
5. September 2016 at 04:56
Ben, The term “helicopter drops” generally refers to combined fiscal monetary expansions, not a literal drop of cash out of a helicopter.
Ray, You said:
“given that money is neutral, you cannot ‘finance’ a deficit with inflation.”
That’s a real knee slapper. You brought a smile to my face this morning.
Ben J, Count on Ray to always come up with the funniest claim of the day. He’s my favorite clown.
5. September 2016 at 06:00
I think Krugman might have gotten on the wrong track by trying to frame this issue in Ricardian equivalence terms.
I think it is mostly this. Krugman is so convinced that even brilliant economists mistakenly apply REP to changes in the path of government spending that he probably tries to remind his plumber that the clog is unrelated to REP.
What Sims is saying seems straightforward. Whether fiscal “expansion” works under FTPL is the same question as whether monetary expansion works under MTPL: Did the expected nominal path change? So his comment should not be confusing. And by fiscal “expansion” Sims does not merely mean a shift or increase in G, but rather a reduction in the present value of primary surpluses.
But Krugman is seemingly upset that someone, somewhere is talking about fiscal expansion without confirming his belief that temporary G will definitely work because of consumption smoothing, the NK assumption that future Y is pinned down by full employment, and the implicit no-crowding-out assumption; and of course he wrote a paper in 1998 so QED. But under that highly stylized model I think Krugman is right that a temporary increase in G could “work” (increase current Y) without increasing expected inflation. I think the SRAS would or at least could actually be flat in a version of his NK model, with the natural rate increasing and all of the increase in current NGDP being real with future Y unchanged.
But even if the increase in Y was partly real and partly nominal and the SRAS was not flat, which also seems possible under the model, someone might still describe that as not working via increasing expected inflation (which could be considered a very short term by-product) in the way that FTPL or monetary policy is meant to work. Even if the CB offsets the small part of Y that is an increase in inflation in this version of such a model, the real increase in Y is not necessarily offset (because the natural rate is rising more than the CB is raising rates; it is not the increasing in P that is causing the natural rate the rate to rise). The fact that you can have NK models that cure output gaps without changes to the expected price path is one reason that a lot of people reasonably describe these models as more RBC than monetarist, irrespective of what they were meant to be.
5. September 2016 at 06:59
Assume that the govt runs a deficit of a given size funded by bond sales, and the CB generates inflation by buying some of these bonds back.
If the combined CB/govt decide to increase inflation they could either
– Buy back more bonds while leaving govt spending the same
– Increase govt spending while leaving bond sales the same
– QE type activity
(I think the second approach is HM?)
If interest rates are so low that bonds and money become substitutes then the first approach will likely not generate inflation while the other 2 options probably would.
A possible problem with QE-type activity is that it directly messes with asset yields and probably relies too much on wealth-effects. This may have unforeseen side-effects on the economy. Why take the risk ? An increase in govt spending can be achieve just by unfunded tax cuts which if focused on sales tax reduction should have a fast short term effect.
If this additional inflation needs to be backed out at some time in the future it can be done via corresponding tax increases in the future (which will be benign as their sole purpose is to prevent inflation). If appropriate these tax increases could be spread over time via future bond sales.
5. September 2016 at 07:01
Mish announces the BOJ next plan, more negative rates. They did not create zero interest perpetual bonds. It was just talk.
With Japan, it is pretty much just all talk.
http://www.talkmarkets.com/content/global-markets/no-limit-to-monetary-easing-says-bank-of-japan?post=105332&uid=4798
5. September 2016 at 07:05
It is against the law for Japan to increase the money supply without offsetting it, sterilizing it. It is against the law for the BOJ to directly underwrite government debt:
http://www.reuters.com/article/us-japan-economy-helicopter-idUSKCN0ZU11Z
Again, I trust Reuters’ analysis not one that says they did helicopter money and failed.
5. September 2016 at 07:38
And I think Sims is kind of funny. The idea that people hold money just to do transactions is kind of funny. People hold dollars in order to SAVE THEM, especially when they perceive investment as being dangerous or manipulated by the elite.
And this guy wants Fiscal spending in times of low interest rates, but doesn’t this debt have to be rolled over down the road at the prevailing interest rates in the future?
Seems risky just to create a few more treasuries for the collateral hoarders.
5. September 2016 at 11:43
Gary,
In general, that’s not true about dollars. Very little wealth in 2007 was held in dollars. Basically the only long-term holders of dollars were:
– Banks with required reserves.
– Criminals or third-world savers without easy access to investments.
By 2007, required reserves actually went down even though NGDP was still going up. Clearing time for transactions were reduced and some large transactions were “in-kind” asset for asset transfers.
To put it precisely, if the natural rate goes below zero, then money is equivalent to T-bills. The ratio NGDP/(money + T-bills) goes down as demand for money includes both money for transactions and money as store of value. If more T-bills are issued to pay for real economic goods, then the new T-bills satisfy the safe asset demand. Your impression seems to be that T-bills are only issued to increase the US Treasury’s cash balance, in which case yes, that wouldn’t do anything.
Ricardian equivalence says the demand for safe assets would increase to offset the deficit spending because people will worry about future taxes. But that seldom happens in practice, esecially at the margins.
5. September 2016 at 13:28
Thanks Waters. So, in 2007 there was a shortage of saved dollars, and,a shortage of tbills according to Stein and that must explain why the destruction of subprime was facilitated as Erdmann has said. He said sterilization was the destruction of subprime even though all subprime was not poorly underwritten.
5. September 2016 at 15:30
Right. Spend other people’s money less judiciously.
The problem is simple. Secular stagnation was fostered as soon as financial innovation became saturated in 1981. Thus, DD turnover finally failed to offset the bottling up of savings within the CBs. It’s all over. We’re headed for a permanent and continuous deceleration in R-gDp.
I.e., all savings held by the CBs originate within the system itself. And savers never transfer their savings out of the CB system unless they hoard currency. The only way to activate savings and otherwise put savings to work is to transfer savings through non-bank conduits period, viz., get the CBs out of the savings business.
Unless savings are expeditiously activated a dampening economic impact is perpetually exerted. And bank-held savings have a velocity of zero. CBs always create new money when they lend/invest. But don’t even try and explain that to a banker. I.e., the ABA is public enemy #1.
5. September 2016 at 15:43
There was no “shortage of dollars” in 2007. The demand to save in 2007 had a Wicksellian natural rate above 0%. If the Fed was targeting 2% inflation, then the market rather than the Fed sets interest rates. How much people want to save and the amount of investment opportunities fundamentally set the interest rate, as you hold inflation constant at 2%.
Outside the zero-bound, the pure amount of dollars out there don’t really matter. Millions of market transactions decide how many dollars is needed to generate a give level of inflation. The Fed follows along as they adjust the interest rate target to hit the inflation target and then adjust the monetary base to hit the interest rate target.
The appetite to save really went up in late-2008, which is clear from the market data and anecdotes of savers around that time. For simplicity, first assume the Fed for some reason can do nothing other than lowering interest rates through buying short-term T-bills. The Fed first reduces interest rates to zero to try to hit that 2% inflation target. Then, once interest rates are zero, buying more T-bills does not increase actual economic activity. Zero-yielding three-month T-bills are replaced with zero-yielding cash.
In this extreme scenario of Fed impotency, fiscal deficit spending creates higher nominal demand for real economic goods where none would have existed. To put it precisely, the natural rate may be -4% in order to hit 2% inflation.
But who is going to trade 0% yielding cash for a -4% yielding bond? The floor of short-term T-bills is 0% or very slightly negative (whatever the holding cost of paper cash in vaults is). With a 0% floor, there is a surplus of demand for 0% yielding assets. The only way for the market for cash and t-bills to clear is pushing up the value of cash, or deflation.
(Natural rate, inflation) is a loci of points which satisfy the market and the (impotent) Fed cannot control. Above, (-4%, 2%) is a point that satisfies the market. With rates having a floor of 0%, what’s the point for (0%, ?%). It may be something like -4%. It’s like if the Fed’s “inflation target” became -4% and the interest rate for hitting that was 0%.
With the impotent Fed model, the US government’s fiscal spending shifts the supply curve of investments/saving to the right. In other words, the US government’s fiscal action changes the underlying market which is out of the (impotent) Fed’s control. The locus at (0%, -4%) could become (0%, -2%), with the change from -4% to -2% deflation signifying many more jobs due to sticky wages. If the US government simply issued T-bills to increase their cash balance more than usual, then the (0%, -4%) point wouldn’t change. The US government in that case would shift both the supply and demand curves for investments out equally, as the increase in cash balance offsets the increase in available T-bills.
This impotent Fed is not realistic, but it’s a good starting point. The model also does not have long-term investments. Krugman’s 1998 model still has an impotent Central Bank, but the Central Bank is credible in not raising interest rates when the natural rate does go back up above 0%. Even in a zero-bound environment with an impotent Central Bank, a credible promise of higher inflation when the natural rate goes up can lower long-term real rates today and therefore increase demand today, not just in the future.
The Central Bank can also buy long-term Treasuries and some more unorthodox policy such somehow charging negative interest on cash. I’m not putting any of that stuff on the table for now. I’m just saying it’s clear how fiscal spending increases demand at the zero-bound given only convention monetary policy.
5. September 2016 at 16:03
@Matthew, thanks again. But you said: “In general, that’s not true about dollars. Very little wealth in 2007 was held in dollars. Basically the only long-term holders of dollars were:
– Banks with required reserves.
– Criminals or third-world savers without easy access to investments.
By 2007, required reserves actually went down even though NGDP was still going up.”
I thought that was a shortage of dollars. If the banks and the people didn’t have dollars, where was the excess of dollars, offshore?
I remember, also, that many said deficit spending was not robust enough after 2008. That could have been true, but in today’s scenario, the Republicans do not want deficit spending and really, the Dems don’t want it either maybe waiting for things to get worse.
Besides, deficit spending is mostly for Wall Street anyway, since it is not a permanent thing. It is for Wall Street to get more pristine UST’s which is the new gold collateral for the derivatives markets.
I just think that if we are going to deficit spend, we should get something out of Wall Street in return, like a Tobin tax or something. I wrote about Krugman and why we should get something a little better since Wall Street is the main beneficiary of deficit spending: http://www.talkmarkets.com/content/bonds/paul-krugman-wants-to-bless-us-but-it-is-mostly-for-wall-street?post=103243&uid=4798
5. September 2016 at 16:15
Scott,
One way or another, we will finance our debt by printing money. I don’t think there is enough in supply-side reforms, even if enacted, to do the trick.
The US government budget deficit has increased $150 billion this year, not because of any new programs (we’ve been pretty gridlocked for several years now.) I see no explanation beyond the first wave of the Baby Boom Entitlement Tsunami, which will eat an ever larger share of the budget in the years ahead.
Adding to the debt is a way to let Boomers continue to skate their way out of the consequences of 21st century profligacy. This is intergenerational robbery.
Old people have the money. Right now, that means Boomers. Inflation is a way to get a pound of flesh out of y’all before you shuffle off this mortal coil.
It’s also not at all clear to me that higher inflation (say 3-4% for a few years) leads to lower real interest rates. Lower nominal rates yes, and lower short-term rates too. But long-term TIPs yields have crashed this year in the wake of continued undershooting of the inflation target and the Fed’s hawkish move last December.
5. September 2016 at 16:21
Oops… I meant inflation will generate ‘higher’ nominal rates, of course. Not obvious that long-term real rates would decline.
6. September 2016 at 01:15
@ssumner, b.cole: “Ray, You said: “given that money is neutral, you cannot ‘finance’ a deficit with inflation.”
That’s a real knee slapper. You brought a smile to my face this morning.”
Please explain yourself Bozo (TM). In this day and age of inflation-adjusted government paper, do you really think anything short of hyperinflation will “finance” a deficit? I suppose if you mean “finance” to strictly mean “pay for” then that’s right, but if you mean “reduce” or “pay off” a deficit with inflation, you’re wrong.
@ben cole: NGDP = RGDP + inflation. If money is neutral, you cannot affect RGDP, we both agree. So how can you ‘finance’ a deficit (that is, pay it off) using inflation? A deficit is real, not nominal. With inflation adjusted paper, you cannot write off a real debt. I will concede that with hyperinflation you can finance a deficit, since people don’t have time to adjust when prices are changing dramatically by the hour. Jokes on both of you.
6. September 2016 at 15:25
Our silly clown Ray says: “A deficit is real, not nominal.“. That kind of sums it all up, doesn’t it? Ray, do you even know what any of the words you write, actually mean? You are so perfectly mistaken, one wonders whether you could really achieve this with mere ignorance (surely that would give you at least a 50% chance of being right!). Is it possible that your comments here are some kind of troll’s attempt at playing an extended joke? If you’re actually an honest person, legitimately trying to communicate what you think — well then, I shudder to imagine what kind of chaos must be going on inside of your brain on a regular basis.
8. September 2016 at 06:11
Don, with all due respect, you make an argument like Scott does. You insult someone and yet you don’t make your own case. That is very arrogant. You have caught the Sumner disease.
The reason economists are ignored is that most of them simply do not have the ability to communicate to others. Really gifted people can communicate. In an age of low inflation, a nominal deficit is pretty real.
8. September 2016 at 10:39
Gary Anderson: “In an age of low inflation, a nominal deficit is pretty real.”
With all due respect, Gary … you’re an idiot. Yes, you’re right that I haven’t tried to explain or communicate. You (and Ray) are making bold claims that aren’t just wrong, but are wrong by definition. The words “nominal”, “deficit”, and “real” all mean something specific (in economics), and the very definitions of the words don’t fit together the way you’re claiming.
Now, I could understand you not yet having a high school level of education about economics. There is no great shame in ignorance. You could be ignorant, but open to learning more. But no: you (and Ray) combine ignorance with arrogance. You confidently state stupid things which are simply false. This isn’t even a matter of a difference of opinion.
If you really are honestly confused, and are looking for guidance, then just try to justify your silly statement. What does “nominal” even mean? What does “real” mean? Do they have different meanings? How would you ever decide whether some economic concept is a “nominal” concept, or a “real” one? Can you list some typical “nominal” economic concepts, and some typical “real” ones?
If you can somehow get through all that, and have any coherent theory about the difference between nominal and real at all, then the idea that a budget deficit belongs in the “real” category instead of the “nominal” category, is ridiculous.
9. September 2016 at 10:01
dlr, You said:
“The fact that you can have NK models that cure output gaps without changes to the expected price path is one reason that a lot of people reasonably describe these models as more RBC than monetarist, irrespective of what they were meant to be.”
Good point.
Ray, That’s right, the government is financed with TIPS, and there is no such thing as seignorage.