Economists understand NRFPC. So why do they get monetary policy wrong?

I am currently working on a paper analyzing the Keynesian/NeoFisherian debate. As you may know, I accuse both sides of engaging in “reasoning from a price change”. That is, they both talk about the effect of a change in interest rates as if interest rates were monetary policy.

In fact, interest rates are not monetary policy; they are the price of credit. And it makes no sense to talk about the effect of the change in any price, for standard “never reason from a price change” reasons.

Most economists understand NRFPC, so why do they get monetary policy wrong? This is the question with which I’ve been wrestling.

If we see rising oil prices we don’t know if that portends more or less oil consumption, because we don’t know if the price increase reflects increased demand or decreased supply. But suppose we do know why oil prices increase. Suppose we know that the oil price increase was caused by a higher tax on oil. In that case we could infer that the price increase is likely to lead to less oil consumption.

I suspect that many economists believe that something similar is going on with interest rates.  At a theoretical level, they may acknowledge that higher nominal interest rates could be the liquidity effect from tight money or the inflationary effect of easy money.  But when the central bank changes their interest rate target, they believe they know why interest rates have changed, and believe that they can then take a shortcut in analyzing the effect of this change in rates.  But that’s wrong, because money is special.

Here’s an analogy.  Suppose Jeff Bezos decides to buy $50 billion in Treasury bonds.  In that case, we can infer that the impact is likely to be higher bond prices and lower bond yields.  Now suppose that the Fed buys $50 billion in T-bonds.  (And to make things simple, let’s assume we are back in the 1990s, before the zero bound issue.)  Will the Fed’s bond purchase raise bond prices and reduce yields?  Maybe, but it might also reduce bond prices and raise yields, especially if it leads to higher inflation expectations.

Why is the Fed different from Jeff Bezos?  Because a purchase by Bezos does not change the money supply, and hence has no first order effects on the value of money.  In contrast, a Fed purchase will increase the money supply, and this may well boost inflation.  A Fed open market purchase impacts both sides of the market.  Indeed the big Fed bond purchase of the 1960s and 1970s caused inflation expectations to rise, and this reduced bond prices.  In contrast when you or I spend money, the market for the good we buy is affected much more than the market for money (where the effects are trivial.)

Keynesians correctly assume that a rise in interest rates relative to the equilibrium interest rate will tend to reduce inflation.  But they wrongly assume that when the Fed raises its target interest rate this is causing the market rate to rise relative to the equilibrium rate.  That might be true, but it also might be false.  Keynesians underestimate how much central banks impact the equilibrium interest rate through their policy decisions.

NeoFisherians correctly assume that if both the Fed’s interest rate target and the equilibrium rate rise at the same time, then inflation is likely to rise.  They also correctly assume that in the longer run, the target interest rate and the equilibrium interest rate tend to move together.  So far, so good.  But they underestimate how often a given Fed rate increase will increase the interest rate gap (target rate minus the equilibrium rate), and thus tighten monetary policy.

What matters is the target rate minus the equilibrium rate.  Keynesians are too inclined to see any move in the target rate as affecting that gap, whereas NeoFisherians are too inclined to ignore that distinction, and assume the target interest rate is moving with the equilibrium interest rate.

The NeoFisherians are right that the Fed can move the equilibrium interest rate.  But the Fed does not do so by moving the target rate in the desired direction, indeed just the opposite.  If the Fed wants the equilibrium interest rate to rise, then they need to reduce the target interest rate faster than the equilibrium rate is falling.

If the Fed can’t cut the target rate any further (zero bound), then they need to raise the equilibrium interest rate via the “expectations fairy” channel.



34 Responses to “Economists understand NRFPC. So why do they get monetary policy wrong?”

  1. Gravatar of Raver Raver
    20. April 2020 at 19:52

    Negative $37 oil sure makes me want to reason from a price change. Anyway, when I heard the news I immediately drove to the furthest gas station.

  2. Gravatar of gt gt
    20. April 2020 at 20:20

    The negative oil prices are crazy, but it’s not quite as crazy as it seems. The negative price was for the May WTI future, which stopped trading tonight. The June future is still quite positive ($21/barrel at the time of writing). Of course the price is still wildly low, and the fact that this happened is a bad sign, but it’s not like gas stations are going to be paying you to take their gas.

    Retail gas prices seem to be down to about $1.50/gallon on average in the US. ( A good time for drivers, but a bad time to be driving.

  3. Gravatar of ssumner ssumner
    20. April 2020 at 20:52

    Raver, Yes, that price made me laugh out loud.

  4. Gravatar of Raver Raver
    20. April 2020 at 20:53

    Seriously, what I don’t get is how high the stock market is given that we are in the face of a long lasting depression. This makes me believe current stock market levels are anticipating a lot of inflation. Of course if the market crashes soon, that changes that view.

  5. Gravatar of Ray Lopez Ray Lopez
    20. April 2020 at 21:40

    For those of you like me that was a bit confused by the acronym by Dr. Sumner (another brilliant post btw), see here: – Never Reason from a Price Change (fiscal policy)

    …somebody added “(fiscal policy)”, rather than monetary policy, which seems strange to me, can long-time readers tell us if this is not accurate?

    @raver – keep in mind Sumner claims the stock market not crashing after the Fed March 15 “QE Infinity” announcement is *not* due to the Fed buying stock futures or indexes. It’s apparently either crowd sentiment and/or the expectations fairy. Strange but that’s what our host thinks, refusing to take credit for what I would have thought is the greatest monetary coup in history (i.e., the Fed following Sumner’s Rx with NGDPLT and incidentally pumping up stocks, preventing a crash). PS–if you’re really young and hip as you claim you are, have you broken up with your gf yet? Ha. trick question.

  6. Gravatar of Rajat Rajat
    20. April 2020 at 23:14

    I am struggling with this right now – well, the NK version of NRFPC. Please bear with me…

    A few weeks ago, the RBA introduced ‘yield curve control’ which Governor Philip Lowe expressed in a speech today as follows:

    “the introduction of a target for the yield on 3-year Australian government bonds of 25 basis points, and a preparedness to buy government bonds in whatever quantities are needed to achieve that target”

    Governor Lowe explained that initially, the RBA had to purchase $A 4-5 billion of bonds per day, but that “as conditions… improved” and the yield settled at 0.25%, they’ve had to buy much less. He didn’t say what the RBA intends to do next if expected inflation keeps falling. In the past, he’s hinted that the RBA might start buying bonds with longer maturities (out to the 10-yr). Lowe seems to think that 0.25% yields as far as the eye can see is an expansionary policy. I disagree, but few others share my frustration.

    Off-topic, but in the same speech, Lowe was at pains to emphasise that YCC is not MMT:

    “I would like to restate that we are buying bonds in the secondary market and we are not buying bonds directly from the government. One of the underlying principles of Australia’s institutional arrangements is the separation of monetary and fiscal policy – that is, the central bank does not finance the government, instead the government finances itself in the market. This principle has served the country well and I am confident that the Australian federal, state and territory governments will continue to be able to finance themselves in the market, as they should.”

    Yet, 3 weeks ago (March 30) when the Federal Government announced a larger-than-expected fiscal stimulus package of $A130 billion (about 6% of GDP mainly in the form of 6 months’ worth of wage subsidies), the ASX200 rallied an extra 3% in the final half-hour of trade: This suggests the market expected far-from-perfect monetary offset, probably due to Governor Lowe’s fixation with doing whatever it takes to *maintain a target nominal bond yield* rather than whatever it takes to hit the RBA’s inflation target. Is this not MMT in effect if not in name?

    Interested in your thoughts, Scott.

  7. Gravatar of Matthias Görgens Matthias Görgens
    21. April 2020 at 01:43

    Rajat, if you have a strict interest rate target instead of eg an inflation target, then monetary policy is going to offset any impact that fiscal policy has on the prevailing interest rate, but not the impact that fiscal policy has on inflation.

    That’s all very simple and conventional. Nothing MMT about it, or is it?

  8. Gravatar of Rajat Rajat
    21. April 2020 at 04:35

    Matthias, I was thinking monetary offset would require the RBA to signal that it was ‘doing less’ in response to fiscal stimulus, such as by reducing its bond purchases. Above the ZLB, one would expect an inflation-targeting central bank to respond by raising its policy rate (faster), similar to how the Fed reacted to the Trump fiscal expansion. The RBA’s yield curve control is a bit more ambiguous, because although the expressed intent is stimulatory (like conventional QE), it creates an expectation that rates will be low for years. And Lowe’s talk of moving out along the curve sends very mixed signals, because there is unlikely to be an equilibrium in which 10-yr yields of 0.25% are compatible with expected inflation of 2.5% (the RBA’s target). Signalling no change to the rate path suggests no monetary offset.

  9. Gravatar of Michael Rulle Michael Rulle
    21. April 2020 at 05:29

    One question I always have and always have had—is how does one determine the equilibrium rate in real-time? If the rate cannot be used for prediction relative to policy—then we are back to that old circular reasoning conundrum

  10. Gravatar of Todd Ramsey Todd Ramsey
    21. April 2020 at 06:36

    Professor Sumner-

    Is the TIPS spread the best indicator we have for market expectations, given the lack of a robust market for NGDP forecasts? (I understand that TIPS is only prices, not output.)

  11. Gravatar of Spencer Hall Spencer Hall
    21. April 2020 at 07:17

    Link: Daniel L. Thornton, Vice President and Economic Adviser: Research Division, Federal Reserve Bank of St. Louis, Working Paper Series

    “Monetary Policy: Why Money Matters and Interest Rates Don’t”

    Thornton: “the interest rate is the price of credit, not the price of money (i.e., the price level.)”

    Link: “Exposing The Fed’s ‘H-Curve’

    “The line is curved, or non‐linear, because the ‘economic benefits’ slope will differ at every point along the curve. This is somewhat obvious as a slope measures the rate of change and central bankers admit that their effectiveness weakens over time and with each successive ease.”

    The correct remedy is to drive the DFIs out of the savings business. Start by lowering the thresholds for FDIC deposit insurance.

  12. Gravatar of msgkings msgkings
    21. April 2020 at 08:00


    Perhaps we are not in the face of a long lasting depression. It’s kind of uncharted territory, we’ve never deliberately shut down the economy and then started it back up before. Perhaps it will be a very deep but not too lengthy depression.

  13. Gravatar of Gene Frenkle Gene Frenkle
    21. April 2020 at 08:39

    From 2001-2008 we knew the increase in the price of oil and natural gas was due to increasing demand and plateauing supply. So how do we know this? By looking at every other major commodity which saw increase in both supply and demand and price. So we were in a commodity super cycle but for some reason on a global level only oil saw a supply plateau in the face of higher prices, and in America natural gas saw a supply plateau in the face of higher prices. So why were those two commodity markets dysfunctional? In America the energy industry was paralyzed by lazy groupthink and self-serving conventional wisdom that North American hydrocarbon production had peaked, and on a global scale the specter of a stable Iraq undermined investment in global oil production.

  14. Gravatar of Spencer Hall Spencer Hall
    21. April 2020 at 08:39

    The error is that economists can’t distinguish between money and credit. Money is the measure of liquidity (bank debits), the yardstick by which the liquidity of all other assets is calculated.

    Savings flowing through the nonbanks increases the supply of credit, but not the volume of the money stock. There is just an exchange in the ownership of existing deposit liabilities in the payment’s System – a money velocity relationship.

    Velocity has declined since 1981 (the culmination of the “monetization” of time/savings deposits, e.g., the daily compounding of interest). This is because an increasing percentage and an increasing volume of savings have been impounded in the payment’s

  15. Gravatar of Spencer Hall Spencer Hall
    21. April 2020 at 08:44

    Unless savings are activated, put back to work, completing the circuit income and transaction’s velocity of funds, a dampening economic impact, a deceleration in money velocity, is engendered and metastases, resulting in secular strangulation since 1981 (not because of robotics, not because of demographics, not because of globalization).

    As the 1959 economic syllogism posits:

    #1) “Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…
    #2) ”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…
    #3) ”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods” (CAPEX)

  16. Gravatar of Gene Frenkle Gene Frenkle
    21. April 2020 at 08:58

    Spencer Hall—your 1959 economic syllogism is why the energy profits in the time period 2001-2008 wreaked such havoc in the American economy and in many other economies worldwide. Our energy intensive consumer spending economy had no way to process high energy prices and the profits they were injecting into the financial system.

  17. Gravatar of ssumner ssumner
    21. April 2020 at 09:02

    Rajat, You asked:

    “Off-topic, but in the same speech, Lowe was at pains to emphasize that YCC is not MMT”

    The distinction between buying bonds in the primary and secondary market is meaningless, as far as I can see. (Unless I’m missing something.) And I had thought MMT was a theory, not a policy. But then I never understood MMT, which seemed to be a set of meaningless statements like “banks don’t lend out reserves” or “money is endogenous”, plus accounting identities turned into causal relationships.

    Agree about YCC being an ambiguous policy.

    Michael, Yes, it’s almost impossible to know it in real time.

    Todd, It might be the best single indicator, but a set of various other indicators (combined) might be superior.

    Spencer, Good points about FDIC, and money vs. credit.

  18. Gravatar of LC LC
    21. April 2020 at 12:36


    What’s your take on Markus Brunnermeier’s frame work on International Monetary Theory?
    I can’t find an online print archive of his 2019 papaer with Sannikov, but a presentation he gave is here:

    He calls real risk-free rate but I interpret it as an expression for the natural equilibrium rate. It is a function of time preference + (additive) consumption smoothing part (essentially expected growth over time) – (subtractive) risk factors from shocks.

    Viewed this way, the equilibrium rate can be seen to have components that can make it go up (expected growth > shock factors) or go down (expected growth < shock factors). Then the role of central bank is to keep the rate near the path of expected growth in the presence of shocks. This to me seems to be a good mathematical model approximation of the NGDP targeting approach.

    I might be completely off base in this interpretation but wanted to hear your take.

  19. Gravatar of ssumner ssumner
    21. April 2020 at 14:46

    LC, I’m skeptical of any model that tries to directly estimate the natural rate. I prefer setting rates where the market thinks the natural rate is located, via my “guardrails” approach.

  20. Gravatar of Benjamin Cole Benjamin Cole
    21. April 2020 at 16:14

    Suppose Jeff Bezos decides to buy $50 billion in Treasury bonds. In that case, we can infer that the impact is likely to be higher bond prices and lower bond yields.–Scott Sumner

    I wonder about this. If we assume globalized capital markets and that money is fungible, and that Bezos did not reduce consumption but rather switched from stocks to bonds, then would there be any effect?

    It seems to me the vacuum created in the stock market by Bezos’ exit would attract capital from all other capital markets, including bond markets, thus offsetting Bezos’ actions.

  21. Gravatar of Michael Sandifer Michael Sandifer
    21. April 2020 at 17:26


    I’m curious as to whether you have any thoughts to share on von Neumann’s general equilibrium model, which sought to correct problems with the Walrasian approach. In it, it was posited that the r should equal the GDP growth rate. Do you just consider this a very old, obsolete model at this point?

    My impression is that economists are nearly certain r should not necessarily equal the GDP growth rate in monetary equilibrium.

  22. Gravatar of Ray Lopez Ray Lopez
    22. April 2020 at 00:35

    @Michael Sandifer – to the extent you’re not just trying to signal to the rest of us your putative erudition, why not just email Sumner with your off-topic question? His email is the same as his Bentley College one. I bet Sumner is no longer current with economic models, and if you read Piketty you’d know r > g is the latest model, and indeed r=GDP seems oversimplified. I’d like to know Sumner’s views on why he thinks the C-19 virus is not a release from a Wuhan lab, but you don’t see me posting here asking him questions on such an off-topic.

    @Ssumner – in a future post I’d love to hear your reasoning on why SARS-CoV-2 is not a chimeric virus, please refer to the emails I sent you.

  23. Gravatar of Benjamin Cole Benjamin Cole
    22. April 2020 at 02:45

    “Spain to let children out, aims for lockdown easing by late May”–Reuters

    I happen to be against the lockdowns. But Spain and Japan are doing lockdowns, but opening schools. It is well known children are nearly immune to C-19, but can obviously spread it around…in schools they will easily infect each other….then go home.

    Are governments shooting for herd immunity, but just not saying so? Bring it on slowly, so to speak? I hope so, because otherwise we have destroyed livelihoods and economies for nothing…

    PS….I find MMT easy to understand…much easier than orthodox Keynesian or monetary policies. Each to his own.

  24. Gravatar of Michael Sandifer Michael Sandifer
    22. April 2020 at 04:49

    Ray Lopez,

    My question to Scott is not as off-topic as it seems, as “r” in this case refers to the nominal risk-free interest rate, not the return on capital. It’s a question about monetary policy, not factors that may be involved in growing income inequality.

    While von Neumann’s model didn’t address monetary equilibrium, he did have at least a priori reasons to think r should equal GDP growth, as I do. While his model is old, first being published in the 30s, it was apparently very influential, and introduced linear programming to macroeconomics. This was a fundamental contribution to the field, and I’ve learned to do basic linear programming to solve optimization problems.

    The logic I use is that GDP growth is equal to the average rate of return of alternatives to government bonds, in monetary equilibrium, because the risk is symmetric, being equal and opposite.

    If there were a government security that paid a dividend equal to GDP growth, assuming an equal random probability of RGDP booms and slumps, the risk of real capital gain or loss would be equal to that of government bonds. Hence, arbitrage would ensure equal expected rates of return, in monetary equilibrium.

    The implication, which a denier of shorter-run monetary non-neutrality would reject, is that there is in fact a much more definitive way to judge the stance of monetary policy than economists currently recognize, and hence that money’s been mostly tight since the 1980s, for example.

    Indeed, there does at least seem to be more structural information in interest rates than market monetarists acknowledge, given that economic growth reliably slows when r > GDP growth. This suggests an upper limit to interest rates, which is consistent, but not exclusively consistent with my hypothesis.

    Generally, I’d rather not invade Scott’s email box, as he’s very busy. He’s much more casual with replies here.

  25. Gravatar of ssumner ssumner
    22. April 2020 at 10:08

    Michael, You asked:

    “In it, it was posited that the r should equal the GDP growth rate. Do you just consider this a very old, obsolete model at this point?”


  26. Gravatar of Spencer Hall Spencer Hall
    22. April 2020 at 11:47

    R * is a product of the banking system. If increasing infusions of Reserve bank credit are used, as opposed to the utilization of savings, R * is subverted.

    It is axiomatic. High real rates of interest are only given with a high utilization of savings. With the remuneration of IBDDs, real rates of interest will continue to fall, investment will continue to decline, and income inequality will increase.

  27. Gravatar of Spencer Hall Spencer Hall
    22. April 2020 at 11:58

    Take the “Marshmallow Test”: (1) banks create new money (macro-economics), and incongruously (2) banks loan out the savings that are placed with them (micro-economics).

    As Luca Pacioli, a Renaissance man, “The Father of Accounting and Bookkeeping” famously quipped: “debits on the left and credits on the right, don’t go to sleep with an imbalance”.

    You have to retain cognitive dissonance capacity, like Walter Isaacson described Albert Einstein’s ability: to hold two thoughts in your mind simultaneously – “to be puzzled when they conflicted, and to marvel when he could smell an underlying unity”.

    It’s also like Athenian philosopher Plato — whose “first fruits of his youth infused with hard work and love of study” said:

    “We seem to find that the ideal of knowledge is irreconcilable with experience”.

    It’s all fools gold my friend.

  28. Gravatar of Ray Lopez Ray Lopez
    22. April 2020 at 12:38

    @Michael Sandifer – off-topic, what do you think of money non-neutrality in the very long run? I notice (as a denier of short-run money non-neutrality btw) that societies seem to like the ‘unit of account’ aspects of money, and money seems to expand with GDP in traditional (bullion coin type) societies so the supply of precious metals increases as GDP or population increases (or even fiat metal coins, e.g. copper). Have you noticed this? Another way of putting this is people don’t seem to like deflation (sticky prices if you will).
    And I doubt Sumner is that busy, he seems to reply to everybody in this, his ‘drunk’ blog. He’s retired anyway.

  29. Gravatar of Spencer Hall Spencer Hall
    23. April 2020 at 05:56

    “According to the elementary logic of the so-called equation of exchange, any change in either the supply of, and or demand for, money , to the extent that the change is not immediately and fully reflected in an (equilibrating) change in the price level, will imply changed values of real output and employment.”

    To quote economist John Gurley, ‘Money is a veil, but when the veil flutters, real output sputters’.

    “Moreover, because monetary disequilibrium also involves a distortion of relative prices, its real effects are not limited to mere alterations in total quantities of output and employment but also involve qualitative changes in the composition of each, to the detriment of all-around well-being.”

    “All of this suggests that well-designed monetary arrangements and policies are important to the success of any free-market economic system.”

    “Neutrality of money means that money is neutral in its effect on the economy. A change in the money stock can have no long-run influences on the level of real output, employment, rate of interest, or the composition of final output. The only lasting impact of a change in the money stock is to alter the general price level.”

    “The neutrality of money theory is a core belief of classical economics. It was first proposed by David Hume (1711-1776). And the phrase: “neutrality of money” was coined by Austrian economist F.A. Hayek in 1931.

    Nobel Laureate Dr. Milton Friedman “gave the example of the (neutrality of money) ‘helicopter drop’ to explain the neutrality of money. Imagine a community in perfect economic equilibrium, when suddenly the following occurs:

    “Let us suppose, then, that one day a helicopter flies over our hypothetical long-stationary community and drops additional money from the sky equal to the amount already in circulation-say, $2,000 per representative individual who earns $20,000 a year in income.”

    ”The money will, of course, be hastily collected by members of the community. Let us suppose further that everyone is convinced this event is unique and will never be repeated….”

    “…People’s attempts to spend more than they receive will be frustrated, but in the process these attempts will bid up the nominal value of goods and services. The additional pieces of paper do not alter the basic conditions of the community. They make no additional productive capacity available.”

    ”They alter no tastes….the final equilibrium will be a nominal income of $40,000 per representative individual instead of $20,000, with precisely the same flow of real goods and services as before.”

    There is a “sweet spot”. Money flows, the rate of expenditures, are robust (as concentrations and distributed lags that are mathematical constants clearly demonstrate), not neutral, as hypothesized and mathematically modeled by Bankrupt-u-Bernanke (Brookings Institution), in either the short-run or long run.

    See: January 2004 “Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach” – with Jean Boivin, Piotr Eliasz: w10220

    “Measuring The Effects Of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach,” Quarterly Journal of Economics, 2005, v120(1,Feb), 387-422.

    Leastways, the neutrality of money is denigrated by secular strangulation. I.e., the quantity of money does not just: “determine only absolute prices and their level” but does affect the level of income, interest, rate of capital formation and employment. No, the long-term effect of a deceleration in aggregate demand has a long-term impact on the demand for capital goods.

    See: See: “profit or Loss from Time Deposit Bank” in Banking and Monetary Studies Comptroller of the Currency Unites States Treasury Department, Irwin, 1963, pp. 369-386.

    Money flows do impact “employment, income and output by means other than by just “labour, capital stock, state of technology, availability of natural resources, saving habits of the people, and so on”.

    Money flows may simply adjust existing overstocked inventory levels (e.g., during the X-mas holidays). David Beckworth: “What makes this really interesting is that these wide swings in economic activity are not matched by similarly-sized swings in the price level.” “Macro and Other Market Musings”:

    “It seems, then, that more could be learned about broader business cycle theory from studying GDP and other time series in their raw non-seasonally adjusted form. That will have to wait, however, until the BEA starts releasing the data.”


    Money obviously influences R *, the “equilibrium rate of interest” (and not just because the monetary fulcrum of wedged inflation inverts). A change in M does not cause a proportionate change in P in American Yale Professor Irving Fisher’s truistic “equation of exchange”. Shifts in the money supply do not affect all goods and services proportionately.

    There is obviously “money illusion” as well as shifts in the distribution of income: “the central feature of the modern business cycle: a systematic relation between the rate of change in nominal prices and the level of real output. The relationship, essentially a variant of the well-known Phillips curve, is derived within a framework from which all forms of “money illusion” are rigorously excluded: all prices are market clearing, all agents behave optimally in light of their objectives and expectations, and expectations are formed optimally.

    Even with a mis-named “liquidity trap”, idled money exerts a dampening economic impact.

  30. Gravatar of Spencer Hall Spencer Hall
    23. April 2020 at 06:06

    The neutrality of money has been denigrated again, and again. It is obvious that money is robust under particular and everlasting parameters.

  31. Gravatar of Spencer Hall Spencer Hall
    23. April 2020 at 07:25

    The fact is that the FED should set 3 separate targets, R-gDp, inflation, and N-gDp. All three can be precisely predicted.

  32. Gravatar of Spencer Hall Spencer Hall
    23. April 2020 at 07:51

    Link: “Extrait du Bulletin de ISI of 1937”. – History and forms. Irving Fisher (1925) was the first to use and discuss the concept of a distributed lag.

    In a later paper (1937, p. 323), American Yale Professor Irving Fisher stated that the basic problem in applying the theory of distributed lags:

    “is to find the ’best’ distribution of lag, by which is meant the distribution such that … the total combined effect [of the lagged values of the variables taken with a distributed lag has] … the highest possible correlation with the actual statistical series … with which we wish to compare it.”

    …Thus, we wish to find the distribution of lag that maximizes the explanation of “effect” by “cause” in a statistical sense”.

  33. Gravatar of Michael Sandifer Michael Sandifer
    24. April 2020 at 09:57

    Ray Lopez,

    I’ve thought a lot about long-run money non-neutrality near the ZLB. Ostensibly, wages/NGDP adjust within several years, but symptoms of tight money, such as below target inflation, persist for years thereafter. In this context, especially with a disinflationary bias that comes with inflation targeting, real GDP growth is hampered more than usual by the risk of nominal shocks.

    More generally, meaning ZLB-related risks aside, I suspect the money supply growth must at least meet ex ante expectations to avoid nominal shocks, ceteris paribus. More fundamentally, I suspect the money supply needs to growth at least as quickly as RGDP, minus the ability of wages to adjust in the short-run. Hence, even a bit of mild expected regular deflation might not be suboptimal.

  34. Gravatar of Nick Nick
    28. April 2020 at 06:24

    “If the Fed wants the equilibrium interest rate to rise, then they need to reduce the target interest rate faster than the equilibrium rate is falling.”

    you often use the analogy of driving a car and steering along the road doesn’t really mean the drive is in control. parking a trailer in reverse is a also a good analogy, to steer to the left (desired higher rates) for example one first has to make your vehicle go right (lower rates)

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