A simple model of monetary policy and interest rates

This comment caught my eye:

I think it’s easier for most people (especially laymen) to understand how central banks affect interest rates than it is to understand the mechanics of the money supply and other aspects of monetary policy.

You could probably count on one hand the number of laymen who understand how monetary policy affects interest rates. Suppose you asked an average person how the Fed affects interest rates. What might they say?

Most people would have no idea how to answer this question. Better educated people would attempt an answer, but they would almost certainly be wrong. Consider some plausible explanations:

1. Changing the discount rate? Nope.

2. Changing the interest rate on reserves? OK, but how does that affect market rates? They might cite some sort of arbitrage condition. But from 1913 to 2008 the IOR in America was set at zero, and yet market rates were often well above zero. So that can’t be the entire explanation.

3. Pumping money into the economy? OK, but why would that affect interest rates? They might point to supply and demand. More supply of money means a lower price of money, with the implicit assumption being that interest rates are the price of money. But interest rates are not the price of money; they are the price of credit, and (throughout most of US history) interest rates tend to be higher when money growth rates are higher. Thus money growth sped up in the 1960s and 1970s and interest rates rose sharply. Indeed interest rates rose sharply because money growth sped up (leading to higher inflation.)

Here’s a simple model of money and interest rates:

i = IRG + NRI

That is, market interest rates = interest rate gap + natural rate of interest

The natural rate of interest can be defined in multiple ways, but is usually assumed to represent the risk free short-term interest rate that is consistent with some sort of macroeconomic equilibrium. For simplicity, let’s assume macroeconomic equilibrium occurs when NGDP is consistent with the public’s previous expectations. Even that’s a bit vague, as it raises the question, “Expectations formed at what time?” But it’s a reasonable approximation of what we mean by the concept.

In this model, monetary policy affects interest rates in two ways. Policy affects the natural rate of interest (NRI) and it affects the interest rate gap (IRG). Thus in the long run, a monetary policy that raises the trend rate of NGDP growth from 4%/year to 14%/year will tend to boost the NRI by 10 percentage points. You can call this aspect of policy the “NeoFisherian effect” although it includes both the (real) income and inflation effects.

The other part of policy is the liquidity effect. Because NGDP is slow to respond to changes in the supply and demand for money, policy shocks move the market interest rate away from the natural rate in the short run, producing an interest rate gap.

I cannot emphasize enough that every single monetary policy action influences both the IRG and the NRI; it’s just a question of how much. Furthermore, most actions (not all) push these two rates in the opposite direction. And the liquidity effect has more of an impact on short-term rates, whereas the NeoFisherian effect usually has more impact on medium and longer-term rates.

Imagine asking a layman to explain all this.

Open market purchases raise the supply of base money, creating disequilibrium (excess money supply) at the previous level of interest rates and NGDP. Because NGDP is slow to adjust, short-term interest rates immediately decline to induce the public and banks to hold larger cash balances.

A reduction in IOR reduces the demand for base money, creating disequilibrium (excess money supply) at the previous level of interest rates and NGDP. Because NGDP is slow to adjust, short-term interest rates immediately decline to induce banks to hold existing cash (i.e. reserve) balances.

It is less clear how these actions affect future expected short-term rates; the answer depends on how they influence the future expected path of NGDP, which in turn depends on the impact on the future expected path of policy.

Imagine asking a layman to explain all this!

In general, interest rate gaps move the natural interest rate in the opposite direction. Creating a positive IRG nudges the NRI downward. And in the medium to longer-term, the natural interest rate has more impact on market interest rates than does the interest rate gap. This is what Nick Rowe means when he uses the analogy that monetary policy is like riding a bike where you turn the wheel to the left when you want to go right, and vice versa. If you want lower rates in the long run, you nudge short-term rates higher, and vice versa. Usually.

Imagine asking a layman (or MMTer) to explain all this!!

In some cases (such as Switzerland in January 2015), a cut in the policy rate is associated with the natural interest rate falling, because it is associated with other signals that lead people to expect a more contractionary policy stance going forward. (Signals such as allowing a large upward appreciation in the franc’s exchange rate.)

Imagine asking a layman to explain all this!!!

Before trying to teach students how monetary policy affects interest rates, we should start with something easier, like quantum mechanics.



39 Responses to “A simple model of monetary policy and interest rates”

  1. Gravatar of CB CB
    19. September 2021 at 09:30

    Before I knew any better, I thought: the central bank sets “the” interest rate by fiat. If the value it chooses is too high, then we get a recession. If the value it chooses is too low, then we get high inflation.

    This felt like understanding, but of course it was wrong!

  2. Gravatar of David S David S
    19. September 2021 at 14:38

    CB—x2 for me as well on misunderstanding that.

    Per Scott’s quip about quantum theory, it’s easier to think about the information paradox in black holes than the craziness of monetary policy.

  3. Gravatar of rinat rinat
    19. September 2021 at 15:41

    It’s complicated, because you are trying to make it complicated. You are an astrologist and alchemist that is attempting to fill holes with patches. A theory has a hole, and you plug it, which leads to another failed theory, which you plug again, and another, and another, until your whole society collapses under the weight of dummies because you cannot possibly take into consideration all of the variables. Human society is too complex – ask any Chinese, Russian, Venezuelan, or Cuban!

    Every year, American life gets worse and worse and worse, because of charlatan economists like yourself. Entrepreneurs don’t need you. They actually have the skill to create something, you don’t!

    All of your policies centralize, monopolize, and oligopolize industry. Suburban sprawl and centralization beyond a certain level of subsistence is incredibly harmful. It will lead to MNC’s that control every aspect of your life.

    In fact, they already do!

  4. Gravatar of henry henry
    19. September 2021 at 15:49

    And Sumner wonders why people think he’s arrogant.

    Yes, you are so smart Scott. You are truly the most gifted, the most amazing, the most splendid of all time, lol…

    Only you can possibly understand monetary economics. Not those retarded quantum physicists. Those people could never get it.

  5. Gravatar of harry harry
    19. September 2021 at 16:08

    As an investment banker for twenty five years, I can assure you that Rinat is right. Call him a layman, or some other ad hominem, but U.S. has historically done better with tariffs.

    The most recent example is Japanese tech in the 1980’s, which was way ahead of Apple and Microsoft. Tariffs on tech permitted the U.S. to catch up, and eventually lead the way.

    Furthermore, no industry can survive in the fourth industrial revolution without having high tariffs.

    Two things will happen:

    1. You will lose jobs in manufacturing – which has obviously happened. But soon you will also lose jobs in the service sector. It’s very easy to hire a banker, programmer, or economist abroad at a 30% discount. Most are more educated than the American anyhow. The number of small businesses using “freelancing sites” to hire overseas workers has tripled over the past year alone.

    2. And worse, you will lose the human capital. At first, China may produce imitations. But after imitating a few, they will soon learn how to do it better. And since you no longer produce, and the generations who knew how to produce died, you will NEVER have the capacity to recover that lost human capital. The new generation will not even be able to invest in a factory, because they have no idea “how” to “make anything”.

    The same human capital that rebuilt Europe in less than a decade after WW2. The same human capital that still gives the west it’s competitive edge.

    Economists in the west are indeed destroying their countries.

  6. Gravatar of ssumner ssumner
    19. September 2021 at 16:17

    Harry, You said:

    “The most recent example is Japanese tech in the 1980’s, which was way ahead of Apple and Microsoft. Tariffs on tech permitted the U.S. to catch up, and eventually lead the way.”

    Hmmm, that’s a take you don’t see everyday.

  7. Gravatar of jayne jayne
    19. September 2021 at 16:30

    The third issue with open markets is that when you move into a highly skilled economy, without any manufacturing, you simply presume that everyone can do those highly skilled jobs AND that other countries cannot.

    But most people cannot do highly skilled jobs. ANTIFA, most of BLM, and Appalachia, all resemble the disenfranchised.

    And that crowd of disenfranchised, as it grows larger, creates a real problem for stability.

    They will turn to utopian peddlers, kill millions in a civil war, and destroy hundreds of years of progress.

  8. Gravatar of Arc Arc
    19. September 2021 at 17:05

    As usual the hate squad is out here on active duty so I feel compelled to testify that posts like this are greatly appreciated. A lot of it may be lost on me now, but at least I know what to read up on to complete the picture. (Looking forward to my copy of the book.)

  9. Gravatar of Michael Sandifer Michael Sandifer
    19. September 2021 at 17:20


    Presumably, you’re talking about the BTRON operating system in Japan, which was to be rolled out for wide usage by Japanese firms and schools in the 80s, until it was delayed by the Japanese Minister of International Trade and Industry, after threats of trade sanctions by the US. Japan was also under pressure during the same era to run tight money policies, because people like James Baker thought they might engage in competitive devaluation of the Yen.

    These were very stupid policies by the US. They hurt Japan, but hurt us and the rest of the world too. I oppose any and all industrial policies, other than those necessitated by national security concerns.

  10. Gravatar of marcus nunes marcus nunes
    19. September 2021 at 17:53

    Scott, your basic assumption:
    “Because NGDP is slow to respond to changes in the supply and demand for money…” is not true! From all the evidence I have gathered from the last 30 years, NGDP responds almost instantaneously to changes in Ms & Md.
    Also, the “natural rate of interest” is a mystery. At any point in time no one has a clue to what it is. In addition, no one knows what the natural rate of u or potential y is either!

  11. Gravatar of Michael Sandifer Michael Sandifer
    19. September 2021 at 19:10


    The model here seems very plausible, but do you care to comment on some related points?

    For example, how literally do you take the standard SRAS/SRAD model? The model, as I read it, predicts that inflation will rise with RGDP as real growth approaches potential. Under an inflation targeting regime, particularly one that relied on inflation forecasts that regularly overestimated future inflation, as we had during the Great Recession recovery, is it possible that this could drag a recovery out beyond what one would normally expect? More explicitly, economists seem to think that between 2013 and 2015, there was nothing more monetary policy could do to sustainably boost RGDP growth. In other words, wages had adjusted. I still think that’s wrong, but don’t see it as an indefensible position.

    And, how seriously do you take the savings/investment equilibrium model? My impression is that you take it quite seriously, but there certainly are economists who question it, and I see problems with it in my mind. In some respects, I think the distinction between savings and investment isn’t useful. On the other hand, in some circumstances, they do seem useful. Considering houses is an example. It’s considered investment, which doesn’t necessarily make sense to me for those occupying their houses, but certainly makes sense for landlords.

    More fundamentally, a really, really simple economy, in which an individual or single family grows corn, investment and savings would seem to be the exact same thing, and the economic growth rate would equal the savings and investment rates of return. Does an economy that includes trading among multiple individuals, businesses, and families necessarily change this fundamentally?

  12. Gravatar of ssumner ssumner
    19. September 2021 at 21:48

    Jayne, Don’t worry, Trump’s going to make America great again.

    Marcus, I wouldn’t say that no one has a clue, but it is certainly hard to measure.

    Michael, You said:

    “The model, as I read it, predicts that inflation will rise with RGDP as real growth approaches potential.”

    That sounds like reasoning from a quantity change, which is a no-no.

    “And, how seriously do you take the savings/investment equilibrium model?”

    Which model?

  13. Gravatar of Michael Sandifer Michael Sandifer
    20. September 2021 at 03:23


    I’m referring here to a rightward shift of the SRAD curve along the positively accelerated the SRAS curve:


    Obviously, the model has inflation increasing as RGDP reaches sustainable capacity. So, to try to nail you down on this, do you think this feature of the model is wrong?

    I interpret this feature of the model as meaning that as the labor market tightens during a recovery, nominal wages rise at an increasing rate, requiring sufficient monetary policy accommodation to keep real wages from rising. A flat inflation target could disallow such a rise in inflation, potentially keeping output below potential for extended periods of time.

    I suspect this wasn’t a problem in the prior two recoveries, because fortuitous productivity booms coincided with the recoveries.

    As for the savings/investment equilibrium model I’m referring to, it’s the generic one that has the real interest rate on the vertical axis, with a downward-sloping investment curve that crosses an upward-sloping savings curve:


    Perhaps better to ask, if you can answer to your satisfaction here, what your macro model of savings and investment is? That is, not necessarily what might be presented to undergraduates as a simplified model, but what best reflects how you think the economy works.

  14. Gravatar of Michael Rulle Michael Rulle
    20. September 2021 at 04:42

    Of course we have very little knowledge. Monetary Policy and Economics in general is very complex because it incorporates the behaviors of mankind itself at its core —-the desire to survive—(or the study of overcoming scarcity). It is the study of mankind interacting in trillions of ways to produce outcomes which in the big picture seem difficult to explain—-and all while we the observer are part of the what is studied.

    But forget laymen—-what about economists in general. How many economists can also understand these issues. Maybe all, but somehow I don’t think so.

    It’s an old question but how do we estimate the natural rate of interest—since it is not directly observable (volatility in markets are also not directly observable——but under various assumptions historical volatility can be estimated and the market and models produces forecasts). Can NRI be explained in analogous terms as, for example, volatility?

  15. Gravatar of Michael Rulle Michael Rulle
    20. September 2021 at 04:55

    P.S. re: Quantum Mechanics

    Layman do not really understand this at all. However, physicists do with clarity. Yes, there are the obsessives who just cannot accept certain implications (the implications are mind puzzles) but the non obsessives “merely” accept its utility and move on. So, yes, physics in that sense is much easier.

    However, if we didn’t study economics, we would still practice economics. In fact, one could argue ——with I think some validity——(Hayek virtually implies this—“virtually”) that we are all practitioners of economics by nature. Economists argue about things on the margin. In the grand scope of history Economists have had an impact—-but one wonders how much—or even if it was positive.

    The same is true to some extent in physics—-but I think there is little doubt that the study of physics (a subset of economics—-kind of !) accelerates its utility—-and in fact—-it may even increase its acceleration.

    I do not think this is true for economics. The study helps—-but nowhere near the level it does in hard sciences.

  16. Gravatar of steve steve
    20. September 2021 at 06:44

    and herein lies indisputable proof that economics is truly the dismal science……

  17. Gravatar of derek derek
    20. September 2021 at 06:45

    I am a little confused on the story for a reduction in interest on reserves. Intuitively, I would expect reducing IOR to stimulate long-term investment because banks would be less inclined to leave money idle, thus raising long-term NGDP. But you describe this as a long-term DECREASE in the demand for money, which would cause long-term NGDP to decrease.

    Can someone explain what I am missing in this story?

  18. Gravatar of Todd Ramsey Todd Ramsey
    20. September 2021 at 07:12

    In defense of us laypeople, our confusion is caused by the fact that 95+% of all articles in the lay press state that the Fed changes policy by controlling the interest rate.

    I presume that’s because they don’t understand it, so they are a) reporting on the metric that they can see the Fed rapidly, and b) relying on a legacy of gold standard economics they learned in Intro to Economics?

  19. Gravatar of ssumner ssumner
    20. September 2021 at 08:18

    Michael, Yes, a rightward shift in AD is inflationary. I have no problem with that S&I diagram. It’s not really a useful “model” until you explain the slopes of each curve, and what causes them to shift.

    Derek, A drop in money demand is like an increase in money supply, it’s expansionary.

    Todd, If it makes you feel better, I suspect that most economists don’t understand this stuff very well.

  20. Gravatar of Todd Ramsey Todd Ramsey
    20. September 2021 at 08:28

    So is this the right time to ask about the relationship between inverted yield curves and recessions?

    Fed tightens > Short term rates go up (tight money) and long term rates go down (reduced inflation expectations).

    Sometimes the Fed tightening causes a recession, and sometimes the Fed relaxes enough, early enough, that a recession doesn’t occur. That’s why not every inverted yield curve is followed by a recession?

  21. Gravatar of Rinat Rinat
    20. September 2021 at 08:53

    To understand the uneducated western economist, one just needs to look at the clueless Joseph Stiglitz. This is a guy who won the nobel prize, yet he says things like “American slavery was singularly disturbing”. It’s not “singularly disturbing”. Slavery exists everywhere! 1M whites were enslaved by North African Barbary pirates, which is more then the total number of blacks transported from Africa to the U.S.. Historians say up to 15M whites were enslaved by the Ottomans. Malays enslaved Malays, Chinese enslaved everyone around them. The history of slavery exists in every country. Indeed, the only singular thing that exists today, that has not previously existed in 99% of human history, is liberty! And that is in short supply.

    You might say none of this matters. But I beg to differ. Words matter. History matters. When you have losers like Krugman say things like “rich get richer, and poor get poorer”, he doesn’t know what he’s talking about. Anyone who looks at the data can see that the 1% is a revolving door. Let’s take Sumner for example, since this is his blog. When Sumner started working at Bentley, wherever the hell that is, he was poor. He certainly wasn’t in the 1%. Is Sumner in the 1% today? Well, I don’t know. But I suspect he’s either in the 1% or approaching the 1%. If he saved, he should be!

    Yes, there are a number of aristocratic families who remain in the 1/10th of 1%, but their wealth also fluctuates over time.

    Economists used to be philosophers. They used to understand history, politics, geography, sociology, and view data impartially. Today, they try to be “mathematicians”, in whoich they look for a singular formula that will elegantly describe the human condition. What was once a study of human nature, has turned into a pseudo science with faulty axioms.

    You can continue to fill holes with patches, but the foundation is flawed.

    In 500 years, Thomas Sowell will be considered one of our generations greatest philosophers. In 500 years, nobody will know who Sumner is. Some historian will just view his work as “group think”, “following the pattern of the times”, with very little common sense.

  22. Gravatar of Michael Sandifer Michael Sandifer
    20. September 2021 at 10:17


    Thanks. Now, does your model specify how much change in NGDP we should expect for changes in the nominal interest rate versus the neutral rate, assuming 100% central bank credibility, for example?

  23. Gravatar of Michael Sandifer Michael Sandifer
    20. September 2021 at 10:18

    And, yes, I understand the cause of NGDP changes is not the changes in interest rates, but that both are influenced by changes in the supply and demand for money.

  24. Gravatar of ssumner ssumner
    20. September 2021 at 10:38

    Todd, That’s right.

    Michael, It depends not just on the current interest rate gap, but also the expected path of the IRG over time. I don’t have an estimate of the numbers involved, as I don’t find the natural interest rate to be a useful guide to policy.

  25. Gravatar of Ralph Musgrave Ralph Musgrave
    21. September 2021 at 00:19

    Scott says “The natural rate of interest can be defined in multiple ways, but is usually assumed to represent the risk free short-term interest rate that is consistent with some sort of macroeconomic equilibrium.”

    I suggest further conditions are needed, as follows. First, all taxpayer support (actual or implied) for banks must be withdrawn. Second, government must abstain from creating and spending so much base money into the economy that it then has to damp down the resultant excess demand by borrowing back some of that money, i.e. issue government bonds.

  26. Gravatar of Michael Sandifer Michael Sandifer
    21. September 2021 at 04:26


    The interesting thing about your perspective is that, while it is provocative in many ways, it’s also the ultimate expression of conventional macro. You’re more solid on the fundamentals than most economists, so you see the inherent contradictions in perspectives such as monetary policy losing its power at the ZLB. It’s similar to seeing MLK Jr. as not a revolutionary, but a leader who was just trying to get Americans to live up to their implicit and explicit values.

    There’s much to like in how you see the economy, as I understand it, but I think there are problems too. This shouldn’t be surprising in a way, since you never claimed to have a final theory that explains everything. But, your view does have some problems.

    One big problem in my mind is that stock market volatility seems to contradict your view about the time frame over which economies recover from nominal shocks. Your perspective on this is very conventional. The vast majority of economists seem to agree with you on time frames for wage adjustment.

    Of course, many economists are also troubled by being unable to explain what they see as excess market volatility, from Bryan Caplan to Robert Shiller. I think this volatility is easy to explain, if you accept that we never really fully recover from nominal shocks before the next one occurs.

    I suspect you agree that we never fully recovered from the 1999-2001 nominal shock, since NGDP growth never returned to the Great Moderation trend. But, I argue that even during the Great Moderation, we were never quite at capacity economically.

  27. Gravatar of Doug M Doug M
    21. September 2021 at 09:02

    How does the fed lower interest rates? They buy bonds. This drives up the price. The interest rate is the inverse of the price.

    How do they raise rates? The sell bonds.

  28. Gravatar of ssumner ssumner
    21. September 2021 at 09:17

    Doug, You might just as well say:

    How does the fed raise interest rates? They buy bonds with new money. The new money drives up inflation and nominal interest rates, as in the 1960s and 1970s.

    How do they lower rates? The sell bonds, driving the economy into depression.

  29. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    21. September 2021 at 10:52

    re: “as in the 1960s and 1970s”

    They used new money to drive up inflation in response to Covid-19. Rates hardly moved as a result. In fact, real rates of interest went negative.

    Interest rates are determined by the supply of and demand for loan funds. Loan funds include injections by the Reserve and commercial banks.

    Secular stagnation soaks up private sector demand. It creates an excess of savings over real investment outlets. Public sector supply of securities is then soaked up by the monetization and sterilization of government securities.

    But the sources of supply are perverse. Lending by the Reserve and commercial banks is inflationary (expands the volume and turnover of new money), whereas lending by the nonbanks is noninflationary (matches savings with investments).

    The impoundment of savings by the banks reduces the real rate of interest. The monetary offset exacerbates the decline in the real rate of interest.

  30. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    22. September 2021 at 06:06

    The trends are clear. The drop in velocity is directly related to bank-held savings. Banks don’t loan deposits. Deposits are the result of lending. How do you think the money supply grows?

    The increase in FDIC deposit insurance from $40,000 in 1980 to $100,000 started the decline in velocity. The increase in FDIC deposit insurance from $100,000 to $250,000 was its coup de grâce.

  31. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    22. September 2021 at 06:23

    Jerome Powell screwed up. Eliminating the transfer restrictions, Reg. D’s 6 withdrawals per month on savings accounts, will not increase the velocity of circulation, but will increase the demand for money.

  32. Gravatar of henry henry
    22. September 2021 at 11:44

    Just want to point out that Sumner is once again wrong!

    Remember when he told us that CDC overlords were gods, that everyone else who had a different opinion was wrong, and that we should all do exactly what we are told – to never question the authority and genius of our new masters – and to accept the vaccine with haste and obedience?

    And Remember when he said all the people who oppose the vaccines, regardless of reason, were “anti vax”, ‘Anti science” and “conspiracy theorists”?

    It’s quite amazing that 20,000 scientists fit that description, nevertheless, here is the new Surgeon General of Florida:


    Harvard Medical School grad – must be one of those conspiracy theorists, and anti-science guys Sumner was talking about.

    Looks like Ivermectin and Monoclonal Antibodies are also pretty good, just like we were told by scientists months ago who were not connected to China, Big Pharma, or the CDC. Massive study in India here:


    One day Sumner will realize that just because someone says something on the tele-tube, doesn’t make it true! Perhaps if his book list was longer than 20 (look at his laughably small list he published last year), and he spent more time reading and less time staring at the screen, he might actually have the capacity to analyze and evaluate data without bias.

  33. Gravatar of ssumner ssumner
    23. September 2021 at 19:52

    Henry, Perhaps you are confusing me with a different Sumner.

  34. Gravatar of Doug M Doug M
    26. September 2021 at 13:43

    “How does the fed raise interest rates? They buy bonds with new money. The new money drives up inflation and nominal interest rates, as in the 1960s and 1970s.”

    New money might drive up inflation. This could cause the real rate to go negative. But, buying bonds will drive up the price of bonds and nominal rates are, by definition, the inverse of bond prices.

    And, the consequence of low rates today may be higher inflation and higher interest rates in the near future.

  35. Gravatar of ssumner ssumner
    26. September 2021 at 20:43

    Doug, You said:

    “But, buying bonds will drive up the price of bonds”

    Sometimes it does, while at other times (like the 1960s and 1970s) it drives prices lower.

  36. Gravatar of Todd Ramsey Todd Ramsey
    28. September 2021 at 02:06

    Scott, can you please comment on this thesis?

    Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
    Jeremy B. Rudd


    Economists and economic policymakers believe that households’ and firms’ expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.

  37. Gravatar of ssumner ssumner
    28. September 2021 at 17:17

    Todd, I’m also skeptical of inflation targeting, but for “never reason from a price change reasons”. So I don’t entirely agree with either Rudd or the people he is criticizing.

    I also think he puts too much emphasis on the issue of whether this or that model is false. All models are false; the issue is whether they are useful. (To be fair, he does acknowledge that point.)

    He criticizes models on empirical grounds, and then cites empirical claims that are quite dubious, such as the claim that real wages are procyclical. The cyclicality of real wages depends on the nature of the shock hitting the economy.

    On the plus side, I don’t think inflation matters, so I sympathize with his criticism of models where inflation expectations are central.

  38. Gravatar of henry henry
    29. September 2021 at 09:30

    Just want to point out again Sumner’s political quackery.

    Today, Robert F. Kennedy Jr, and the news giant RT, were banned from YouTube.

    Once again, he fails to see the tyranny of the new MNC nation state.

    RU had to scramble a jet today because the tyrannical Biden administration sent another spy plane over Crimea. If you believe in self determination, then Crimea clearly is RUSSIAN. Go there, ask any random person, and they will tell you that they prefer to be part of Russia – not corrupt Ukraine.

    This is your daily reminder that Sumner’s globalist, leftist, policies will once again bring the world to War, and it will embolden apparatchiks on the left to continue to centralize, centralize, centralize…until you have no freedom left at all.

    Take the red pill before it’s too late. Swing that pendulum back.

  39. Gravatar of John Hall John Hall
    1. October 2021 at 06:08


    I took a look at that Jeremy Rudd paper. It’s not really that he’s arguing that inflation expectations don’t matter. What he’s really says is that the models say short-run inflation expectations matter, but empirically that doesn’t hold up. He argues that long-run inflation expectations matter more and presents an augmented Philips curve that allows for time-varying long-run inflation and mean inflation as different processes.

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