The wrong question

The Neo-Fisherian debate continues, and continues to miss the point.  The debate is framed in terms of whether a higher interest rate causes higher inflation.  But that’s not even a question.  Or at least it’s meaningless unless you explain whether the higher interest rate is produced by an expansionary monetary policy or a contractionary monetary policy. Central banks have the tools to do it either way.  On the other hand I am increasingly getting the impression that the New Keynesian model is incapable of handling that distinction.  Here’s John Cochrane responding to a recent Woodford talk on the issue:

This is a particularly important voice, as it seemed to me that standard New-Keynesian models produce the new-Fisherian result. i = r + Epi is a steady state in all models. In old-Keynesian models, it was an unstable steady state, so an interest rate peg leads to explosive inflation or deflation. But in new-Keynesian models, an interest rate peg is the stable/indeterminate case. There are too many equilibria, but if you raise interest rates, inflation always ends up rising to meet the higher interest rate.

What I can glean from the slides is that Garcia Schmidt and Woodford agree: Yes, this is what happens in rational expectations or perfect foresight versions of the new-Keynesian model. But if you add learning mechanisms, it goes away.

My first reaction is relief — if Woodford says it is a prediction of the standard perfect foresight / rational expectations version, that means I didn’t screw up somewhere. And if one has to resort to learning and non-rational expectations to get rid of a result, the battle is half won.

But that’s only preliminary relief. Schmidt and Woodford promise a paper soon, which will undoubtedly be well crafted and challenging.

If that’s true, then the NK model is obviously very, very flawed.  Noah Smith seems to agree that rational expectations is the key assumption:

The question of whether interest rates affect inflation in a Woodfordian way or a Neo-Fisherian way depends on whether people’s expectations are infinitely rational. Woodford’s new idea – which will certainly be a working paper soon – is that people don’t adjust their expectations to infinite order. He essentially puts bounded rationality into macro. He posits a rule by which expectations converge to rational expectations.

I have one small quibble here.  When Smith writes:

The question of whether interest rates affect inflation in a Woodfordian way or a Neo-Fisherian way depends on whether people’s expectations are infinitely rational.

He seems to imply that he is discussing the real world.  Like it would actually matter whether people had ratex. My hunch is that you can easily get either result with or without ratex, if you don’t restrict yourself to the NK model.  The liquidity effect from easy money should be able to be derived with simple sticky prices, even with ratex.  I’d rather Smith had said:

The question of whether interest rates affect inflation in a Woodfordian way or a Neo-Fisherian way in the NK model depends on whether people’s expectations are infinitely rational.

BTW, in this post I showed how you could get a Neo-Fisherian result.  That doesn’t mean I think they are “right”, just the opposite.  But I am increasingly confident that they have stumbled on something important, a serious flaw in the NK model. I’d rather people continue to assume rational expectations, and fix the model in some other way—like defining monetary policy in terms of something other than interest rates.  Stop assuming that “the central bank raises interest rates” is a meaningful statement.  It isn’t.

PS.  I wrote this a couple days ago but wasn’t sure if I was missing something, so I didn’t post until today.  Nick Rowe’s new post convinced me that I’m not missing something obvious.

HT:  Tyler Cowen





34 Responses to “The wrong question”

  1. Gravatar of Doug M Doug M
    17. July 2015 at 12:56

    The first mistake is to say that here is 1 interest rate.
    Or, that the Fed targets “interest rates.”

    There are multiple interest rates, and the fed targets one of them. The market targets the rest.

  2. Gravatar of benjamin cole benjamin cole
    17. July 2015 at 15:54

    The important thing is whether the Neo-Fisherite model works in theory, not whether it applies to the real world.

    I spent 20 years in and around manufacturing and housing industries. People rarely talked about the Fed, if ever. On interest rates, the working assumeption they pretty much stay wherever they were. No project depended on interest rates–if a project was so borderline that a rise and rates from, say, 2 percent to 5 percent would scotch the project, such a project was never be undertaken.

    Projects were undertaken if people thought the sales were there.

    Sheesh—if I had at lot of business at the transom, I bought new tools and equipment and prospected employees and partners.

    So if demand causes inflation and the Fed raised rates, you would get a simultaeous rise in rates and inflation.

    Or, when inflation rises, people charge more interest.

    I have to say, the Neo-Fisherites have…maybe gotten confused.

  3. Gravatar of benjamin cole benjamin cole
    17. July 2015 at 16:13

    Add on: what about QE in the Neo-Fisherite world? Can the Fed pay off national debt entirely and beat inflation by introducing negative interest rates?
    Forgive typos on previous post…smartphone etc.

  4. Gravatar of Major.Freedom Major.Freedom
    17. July 2015 at 17:47

    “The Neo-Fisherian debate continues, and continues to miss the point. The debate is framed in terms of whether a higher interest rate causes higher inflation. But that’s not even a question. Or at least it’s meaningless unless you explain whether the higher interest rate is produced by an expansionary monetary policy or a contractionary monetary policy.”

    Totally false. Monetary expansion and contraction are not the only causes of price inflation.

    If productivity falls, that makes prices rise ceteris paribus, be suse the same aggregate spending is purchasing fewer goods.

    The question of whether higher interest rates “cause” higher price inflation should be understood in terms of what caused the rise in interest rates. If for example there is a rise in the market rates of time preferences, that is, a sufficient number of people increase their valuation of present goods versus future goods, to a sufficient enough degree, that they consume more and invest less, per dollar of income, that will make interest rates rise.

    Why? Be suse with greater consumption and lower investment, aggregate revenues are unchanged, but aggregate costs fall. A fall in aggregate costs is the result of lower investment, since investment expenditures are what show up as costs on income statements.

    With the same aggregate revenues (rise in consumption and equal fall in investment) but with lower costs, that makes aggregate profits rise.

    Higher profits are characteristic of a more primitive economy. As more and more expenditures take the form of investment, that raises costs and nominal profits fall.

    It is the rates of profit that determine, I.e. constrain, interest rates. When firms earn a higher profit, they can afford to lay higher interest rates and at the same time, they are only willing to lend if they can earn a return comparable to internal equity investment.

    So if interest rates rise, this may well be associated with higher price inflation, if the cause of the rise in interest rates is one of time preference, that is, if overall productivity falls and the same nominal demand chases fewer goods.

    Other factors can affect this result, which means we may not see any empirical positive correlations.

    There are also other relationships between interest rates and prices. If profits rise, that can make certain prices fall, and other prices rise. Not all prices, but some.

  5. Gravatar of Don Geddis Don Geddis
    17. July 2015 at 19:08

    @MF: “The question of whether higher interest rates “cause” higher price inflation should be understood in terms of what caused the rise in interest rates.” Excellent! So you agree with Sumner’s post, then. I’m so glad you two could finally find some common ground.

  6. Gravatar of TallDave TallDave
    17. July 2015 at 20:04

    Epicycle models were right a lot of the time.

    Some models say wet streets cause rain.

    People exchanging time-based securities have to make some assumptions about what money will be worth in the future relative to what it’s worth now.

    mostly O/T: Wondering where the error bars are on Chinese GDP. 10% total inflation since 2001 on rent in urban areas?

  7. Gravatar of dtoh dtoh
    17. July 2015 at 20:32

    Benjamin Cole is right. The only reason there is a debate on this is because most academics have never had any experience setting prices.

    It’s pretty simple

    1. Expected balance of real supply and demand.

    2. A little consideration of buyer’s financial situation (correlates pretty closely with RGDP growth and 1. above)

    3. A dash of hysteresis

  8. Gravatar of Ray Lopez Ray Lopez
    17. July 2015 at 20:57

    @Sumner – wrong question indeed. Back up first and show statistically that the Fed influences the economy in any metric. As B. Cole points out, people don’t care about interest rates since money is neutral. Let the scales fall from your eyes man. It would result in a lifetime of work down the drain, but the change to yourself, your readers and the world would be refreshing. HT: common sense and my previous post, where I reference statistically no influence by the Fed on the economy can be shown. Please prove me wrong with econometrics.

  9. Gravatar of CA CA
    17. July 2015 at 21:45

    Ray, you’ve already said nobody takes Sumner seriously. Why are you commenting here?

  10. Gravatar of Major.Freedom Major.Freedom
    18. July 2015 at 05:20

    CA, you’ve already insinuated you don’t take Ray seriously, why do you direct comments to him?

    And why are you posting on this blog if you don’t take him seriously?

    You are free to not post here anymore.

  11. Gravatar of Major.Freedom Major.Freedom
    18. July 2015 at 06:02


    Maybe there is agreement on how to approach that claim, but I don’t agree that the only cause of price inflation or deflation is monetary inflation or deflation. Sumner began his post with it.

    So when he says we should approach the claim by considering the cause(s) of rising interest rates, he has in mind money printing, the inflation premium. Well yes, it is obviously possible for prices to rise by way of money printing. Indeed, over the long run that has historically been the sole cause.

    And then there is the disagreement that should NGDP change, it is not always and solely the cause of central banks. If for example I choose to spend less today or over the next few months as compared to yesterday or last month, or if I choose to spend the money I’ve been hiding under my mattress the last 5 years, those actions would be the cause for higher or lower NGDP, if all else is equal. The absence of, or “actions other than reversing this” inflation or deflationary activity from Yellen, cannot be the cause of what happened. All effects have existing causes, not absences of causes.

    Sumner wants to effectively believe that cancer is not caused by a person’s inner biological factors and genetics, or exterior factors like nuclear radiation, but rather it is caused by a doctor, any doctor, or maybe a particular doctor, who failed or did not administer some sort of preventative medicine or treatment.

    Sumner’s epistemological framework is that if X occurs, and someone somewhere who is in part the cause of X, while others are also playing a role, could have, if they were paying a different kind of attention to X as such could have prevented X, then the cause for why X occurred is not the many people who actually caused X in the positive sense, but on that person or people who did not pay a different kind of attention to X.

    When I ask such questions like “What motivated all the other people’s actions, other than our man’s actions, in doing what they did such that it played that big a role in X taking place?” the response is “It does not matter. Because our man could have prevented X from happening had he made different actions, this is evidence that all the other people’s actions are irrelevant.”

    I reject that framework because not only is it a purposeful evasion which my nonpolitical curiosity and academic disposition approach does not discriminate against, but I have already learned why history includes periods of time in which I learned what motivated all the “other” people to do what they did such that they played that big a role in X taking place, and a necessary cause is the very “man” Sumner is pointing his finger at and labelling as the man who is the only “relevant” cause of X, whereby Sumner’s advocating that the man double down against everyone else, is only going to motivate them even more to bring about X!

    Sumner believes the man has such power that he can permanently overrule everyone else and not act counterproductively in the course of his activity. That the man can find a harmony, a synchronicity, a balance, between his activity and everyone else, if only he listened to the high priest of MM. THAT is what I know is a myth, a religion, an ancient desire to bring heaven to Earth in the form of socialist power relations.

    The man is to have state power, monopoly power, to direct the course of affairs in the issuance and non-issuance of the medium of exchange. His actions are not to be subjected to market forces of profit and loss constrained to private property rights of the others. His actions are to be maintained and promoted through police state activities, where all the others who would otherwise make their own plans and projects and who would otherwise completely sever their use of the paper the socialist man is issuing, are to be jailed or worse, all under the guise of merely enforcing laws on taxes, as if that justifies the socialist man. After all, the extent of our mindset cannot go further than “IF the socialist man is to issue money, rather than everyone else in a competitive market, THEN he should listen to the high priest of MM. The high priest has the key to the monetary cosmos. We believe him. We have faith in him. You should follow his plans and not your own, as well.”

    This approach is anti-pragmatic. It is self-contradictory and counterproductive. It achieves the opposite of what is intended. And when the opposite occurs, the high priest tells us it is the arbitrary whims of the Gods that caused it. That none of you are in any getter position than the high priest to have foreseen what occurred, so shut up and stop trying to become due facto high priest. The Gods must be obeyed. The Gods know best. All the high priest is doing is whispering in the ear of the socialist man what the Gods are clearly suggesting is his duty to do.

    See, the main problem with your and all the other acolytes’ approach, is that you do not yet see that your entire approach is derived from religious practice.

    Hahaha, no, just because the high priest may from time to time communicate what the Gods want in the form of equations, of mathematical symbols, and statistics (which by the way most of the popular religious theologians have done since the modern scientific revolution), it does not mean that he has rejected religious practice. He is only reinforcing it by using different words that make it seem like economics to the layman and to the already anti-capitalists out there who want an excuse to continue on with that.

  12. Gravatar of ssumner ssumner
    18. July 2015 at 06:03

    Ray says the Fed has no influence on the economy. Ray is terrified that my proposed Fed policy will ruin the economy. Ray used to have an IQ of 130, but more recently it’s slipped to 120.

    Ray, Ray, Ray, Ray . . . life would be so boring without you.

  13. Gravatar of @HPublius @HPublius
    18. July 2015 at 06:28

    I think the Neo-Fisherian debate is a red-herring. First of all, there is no evidence/theory as to why the real rate of interest should trend toward some long-term value that is exogenous to the economy, say 2%. People are willing to pay interest in order to borrow because they expect their incomes to grow in the future. Accordingly, the source of interest is income growth and growth expectations determine interest rates (assuming the central bank supplies reserves consistent with private agents’ preferred allocation of their long-term savings between money and financial assets). Now, does demographic and productivity trends justify that people should consistently expect 2% income growth? No, growth is endogenous to the economy hence there is no long-term value that r should trend to.

    Second, inflation as in QP=MV is nothing more than an ex-post residual. M measures money supply, V measures money demand and Q represents the supply curve which is fixed ex-ante based on the current level of real capital. Accordingly, inflation is the result of the monetary stance. Tight money stance(meaning money supply below desired M balances) leads to negative inflation. Loose money stance (meaning money supply in excess of desired M balances) leads to positive inflation.

    To assess the current stance of monetary policy once should look no further than the velocity of bank money (M2-Base Money). Falling velocity indicates tight money. Rising velocity means loose money.

    In the US, the velocity of bank money since 2010 has been generally flat (albeit for seasonal fluctuations). Accordingly, monetary policy has been largely neutral hence there’s been very little inflation.

  14. Gravatar of Negation of Ideology Negation of Ideology
    18. July 2015 at 07:33

    Scott – Off topic, but do you have any comment on the BLS inflation and wage growth numbers?

    “Over the last 12 months, the all items index rose 0.1 percent before seasonal adjustment.”

    “Real average hourly earnings increased 2.2 percent, seasonally adjusted, from June 2014 to June 2015.”

    Prices rising at 0.1% per year! Is this the hyperinflation the hard money people keep telling us about? Pretty soon we’ll need wheelbarrows to haul our cash to the grocery store!

  15. Gravatar of Ray Lopez Ray Lopez
    18. July 2015 at 07:46

    @Sumner who says: [my numbers] ”
    [1] Ray says the Fed has no influence on the economy. [2] Ray is terrified that my proposed Fed policy will ruin the economy. [3] Ray used to have an IQ of 130, but more recently it’s slipped to 120. [4] Ray, Ray, Ray, Ray . . . life would be so boring without you.”

    (1) correct, the Fed has no influence over the real economy. Prove me wrong with econometrics. If that’s tough to do, please explain better your esoteric theory of why in a blog post. I’m sure many people besides me would be interested in the explanation (I’ve seen a passing reference in Glassner’s blog). Seriously I would like to know why you think there’s Fed influence when the Lawrence Christiano et al paper only shows 60% confidence bands, rather than the usual 95% (see my earlier posts)

    (2) Yes I am, despite my believing in money neutrality. For the same reason E. Burke was terrified of the French Revolution, change is terrifying. An anthropologist once noted that humans are biased against change unless necessary since in early hominid life, any experimentation was usually fatal, since most experiments fail. Radical experimenters who violated the ‘if it ain’t broke, don’t fix it’ rule died young, leaving cautious skeptics (makes sense, like the air pilot’s quip, ‘there are old pilots and there are bold pilots, but there are no old, bold pilots’). Further, while money is neutral (see how people adapted and economies grew in both the deflation of the “Long Depression” of the late 1800s in the USA and the high inflation of Brazil from the late 1940s to 1980s), it is stressful for people to adapt to either deflation or inflation (see W. J. Bryant’s Cross-of-gold struggles and the Brazilian people’s efforts)

    3. An estimate from one test I took. Age makes you dumber but perhaps not 10 points dumber. I demand a retest.

    4. That’s what my fans say, thanks.

    BTW you should answer MF, his Say’s law reasoning is very persuasive to me, for most normal economic conditions. Perhaps his proposals won’t work during extreme economic events, but neither might yours. An economy is both non-linear (transient effects) and linear (steady state effects), with the later more important than the former. Usually people talk past each other by referring to one or the other state without making a clear distinction between the two.

  16. Gravatar of Major.Freedom Major.Freedom
    18. July 2015 at 12:18

    Ray, you’re saying something so obviously illogical that combined with Sumner’s correction and your nose up in the air reaction, borders on stupid.

    If money is purely neutral, then logically NOTHING the Fed can do, no matter how much or how little they print, it will not have ANY effect on the real economy.

    If the Fed does not have ANY effect on the real economy, then it cannot possibly act “destructively” OR “constructively” at the same time.

    Wake the frig up. Money is not neutral. Read Mises! He explains WHY money is not neutral.

    Stop saying the ridiculously stupid claim that money is neutral and has no effect on the real economy. It burns my eyes.

  17. Gravatar of Jeff Jeff
    18. July 2015 at 13:42

    Wow. Next thing you know, MF will be calling Ray a troll.

    Pass the popcorn.

  18. Gravatar of Derivs Derivs
    18. July 2015 at 14:56

    ” No project depended on interest rates-if a project was so borderline that a rise and rates from, say, 2 percent to 5 percent would scotch the project, such a project was never be undertaken.”

    Ben, Back in my evil days, when structured finance somehow fell under the auspices of yours truly. I couldn’t imagine the fire and brimstone that would have been let loose by me had someone ever shown a term project without an embedded yield curve.

    If I showed you a deal with a stream of cash flows at 1,000,000 per month for 30 years at 0%, or the same stream at a straight curve shift to 3%, what is the difference in net present value????

    Hint:it ain’t a small difference.

  19. Gravatar of Don Geddis Don Geddis
    18. July 2015 at 15:47

    Ray vs. Major! Ray vs. Major! I’m pulling up a chair.

  20. Gravatar of Ray Lopez Ray Lopez
    18. July 2015 at 20:01

    @MF – thanks but I think your eyes will sting a bit more. I’ve cited the econometrics cite numerous times showing only 60% confidence that the Fed has any effect on economic metrics. The usual test for statistical significance is 95%. I know as an Austrian you don’t believe in statistics (Sumner himself has failed to come up with any econometrics study to refute mine; I accept his surrender but will continue to hound him).

    History (i.e. statistics) has shown that short of hyperinflation (which even Brazil did not have), money is neutral. It may not however be ‘super-neutral’ (i.e., accelerating money printing–hyperinflation–may have a real effect).

    In his candid moment even Benjamin Cole, a Sumner devotee, has implied that nobody pays attention to what the Fed say (money is neutral). The Fed follows the market. Sumner knows this, but depends on esoteric arguments to back his claim that the Fed has an influence on the economy (his esoteric arguments are such that even his colleagues disagree with them, see David Glassner’s site for a hint of this, the arguments are too obscure to mention but they suggest that there’s a sort of George Soros-type ‘reflexivity’ between what the Fed does and what the market does, hidden away by unmeasurable variables–i.e., ‘angels dancing on pins’ type metaphysics, your guess is as good and as unscientific as mine).

    Now back to our regularly scheduled programming, which is to pick holes in Sumner’s posts, not hard to do…

    Don and Jeff–I see you play the man, not the board, meaning you let personalities dictate what you believe in, rather than the visible facts, a classic chess mistake albeit understandable to those that don’t or can’t think for themselves.

  21. Gravatar of Mike Sax Mike Sax
    19. July 2015 at 02:50

    Ok Ray, let me try to unpack this a little. You say that money may not be superneutral-so that would mean that it has short term effects-no? But then how can you say it has no effect?

    That is standard economics-what Sumner and most believe. There are some heterogeneous economists who believe it has even long term effects. MF is the Austrian and will tell you better than me but I believe that Austrians or at least many of them-Rothbardians?- believe it has long term effects

    On the other hand if you believe it has no effect then why criticize the Fed or any CB ever-as it has no effect?

  22. Gravatar of Mike Sax Mike Sax
    19. July 2015 at 03:12

    Actually now that I look at it I may be mistaken in my use of the word superneutrality.

  23. Gravatar of Mike Sax Mike Sax
    19. July 2015 at 03:28

    I was thinking it meant that money is neutral even in the short term but that’s not what it means at all.

  24. Gravatar of ssumner ssumner
    19. July 2015 at 04:48

    Ray, First it was the nominal economy, and now it’s the real economy. And exactly why are real and NGDP correlated?

  25. Gravatar of Bubble Monger Bubble Monger
    19. July 2015 at 07:07

    ” The debate is framed in terms of whether a higher interest rate causes higher inflation.”

    Wrong answer !!! Higher interest rates are actually very DEFLATIONARY.

  26. Gravatar of Ray Lopez Ray Lopez
    19. July 2015 at 08:34

    @Mike Sax – I also found the term “superneutrality” to be used inconsistently. The main definition seems to be that even accelerating money printing has no real effect, which seems to be rebutted by societies exhibiting hyperinflation. I feel the Fed has *little* (weeks, days, hours) to no effect, short term. The literature I’ve seen says it has a small (up to 4-8 quarters) long term effect but with only 60% confidence level, not the normal 95% confidence. Remember that a 50% confidence level is a coin-toss, so 60% is just a wee bit better than a coin toss (i.e., no effect) and for scientific purposes is not very persuasive (where typically 95% or even 99% confidence level is used). And I can cite you reports anecdotally where the Fed in the early 1980s lowered interest rates and inflation fell (apparently this is now called “Neo-Fisherian”, lol).

    @sumner – “Ray, First it was the nominal economy, and now it’s the real economy. And exactly why are real and NGDP correlated?” – I don’t know what you are talking about professor. I think Fisher said Nominal GDP = Real GDP + inflation, so, ex post, the correlation is linear (y = mx + b, where b=inflation and is a constant, ex post). Please do however tell me why and how the Fed influences the economy. At this point, since I’ve given up hope you’ll ever cite an econometrics study, I’ll settle for one of your “cargo cult” thought experiments. Yes, I’m that desperate.

  27. Gravatar of Jim Glass Jim Glass
    19. July 2015 at 18:57


    Real Interest Rates and Inflation: An Ex”Ante Empirical Analysis
    The Journal of Finance

    ABSTRACT The authors develop a method of measuring ex ante real interest rates using prices of index and nominal bonds. Employing this method and newly available data, they directly test the Fisher hypothesis that the real rate of interest is independent of inflation expectations. The authors find a negative correlation between ex ante real interest rates and expected inflation. This contradicts the Fisher hypothesis but is consistent with the theories of Robert A. Mundell and James Tobin, Michael R. Darby and Martin Feldstein, and Rene Stulz. The authors also find that nominal interest rates include an inflation risk premium that is positively related to a proxy for inflation uncertainty.

    Not a new study, but why would the Fisher effect in the data be new?

  28. Gravatar of ssumner ssumner
    21. July 2015 at 16:26

    Ray, You said;

    “I think Fisher said Nominal GDP = Real GDP + inflation, so, ex post, the correlation is linear (y = mx + b, where b=inflation and is a constant, ex post).”

    I have a PhD in economics, and have no idea what that means.

    Have you been reading Mark Sadowski’s long series at Marcus Nunes’s blog? On economietric evidence for the effect of money?

    Thanks Jim.

  29. Gravatar of Ray Lopez Ray Lopez
    22. July 2015 at 07:03

    @ssumner – y = mx + b is the formula for a straight line, that high school students usually know. Ask your daughter.

    As for Mark Sadowski’s long series at Nunes’s blog (which is aptly named “little stories”) it’s rubbish. Sadowski is straight out of school and used to playing with his Mathematica toolkit hence he says: “The first thing I want to do is to demonstrate that the monetary base Granger causes bank credit during the period from December 2008 through May 2015.” — keyword: GRANGER CAUSES, which is prone to data mining (e.g., world GDP was found once to be highly correlated to the price of butter in Bangladesh). Hence Sadowski (rhymes with sadistic) states in one post: ” In other words there is evidence that the monetary base Granger causes bank credit, but not the other way around.” (from a mere sample size of 73, from 2009 to 2014, hardly an authoritative sample).

    Proof that Sadowski is engaged in data mining is this passage *MY COMMENTS IN CAPS*:(from his online post ‘Monetary Base …in age of ZIRP’): “The response of the Dow Jones Industrial Average to a positive shock to the monetary base is significantly positive from month one through month three. The instantaneous response of the S&P 500 Index is positive but statistically insignificant. FUNNY HOW THAT WORKS–SO DJIA SHOWS A RESPONSE TO THE MONETARY BASE BUT THE BROADER S&P500 DOES NOT??? HOW IS THIS NOT DATA MINING?

    More fundamentally, the root question of WHY and HOW the Fed decides to increase the monetary base is not addressed by Sadowski; specifically, does the Fed increase in response to member banks, or does it ‘force’ an increase onto the member banks (the former being the money neutrality hypothesis, the latter being the monetarists hypothesis)? What Sadowski could be measuring is simply a business expansion. To wit, Sadowski could be measuring this: leading Fed member banks see a pickup in demand for credit from their Fortune 100 customers, borrow money from the Fed, and lend this money to the Fortune 100; Fortune 100 customers use the money to lend to their suppliers, which through the well-known ‘bank multiplier’ effect ends up in a ‘Main Street’ bank credit expansion several months later. It’s well known that Fortune 100 companies are in the vanguard in any business expansion. So Sadowski is doing nothing more than statistically measuring a routine business expansion. This is not proof that the Fed causes an expansion.

    I will try and post this to the nonsensically named ‘Historinhas’ but the censor there may reject my musings, as has the Econlog censor, so I post here first. Thanks.

  30. Gravatar of Don Geddis Don Geddis
    22. July 2015 at 13:24

    @Ray Lopez: Everybody knows that y=mx+b is a straight line formula. That doesn’t even begin to explain your comment. NGDP is not a straight line (and so has nothing to do with y=mx+b). Inflation is not constant. Etc etc etc.

    It’s charming the way you combine great arrogance with astonishing ignorance. Once again, you continue to demonstrate Dunning-Kruger, the “inability of the unskilled to recognize their ineptitude”.

    But back to math for a second, since you seem confused about middle school algebra. At any given point in time t, the equality holds, so NGDP(t)=RGDP(t)+Inflation(t). But this tells you nothing at all about the correlation between NGDP and RGDP. It could be anything. Nor does it have anything to do with y=mx+b. Yes, I know both equations have one thing on the left, and two things added on the right. Sadly, math is more than just superficial pattern matching. You actually have to know what the symbols mean.

  31. Gravatar of Ray Lopez Ray Lopez
    22. July 2015 at 17:35

    @Don Geddis — thanks for taking time to voice your views on a dead thread. We need Simple Machines forum software to make this site more relevant (an oxymoron to be sure, since money is neutral).

    Dunning-Kruger effect? A fancy term for stupid people thinking they are smart. Your projection noted. And speaking of projection, ex post (which means after the fact Don), NGDP and RGDP are indeed connected by a simple linear projection: inflation. In fact, real GDP and nominal GDP have the same slope, ex post, and only a constant, inflation, is added or subtracted. Note the comma Don. Not constant inflation but the constant, inflation, which could even be zero. Eats, shoots, and leaves… vamos! Time for me to leave you, and not a moment too soon, bye.

  32. Gravatar of Don Geddis Don Geddis
    22. July 2015 at 21:14

    @Ray Lopez: Sorry, everything you say here about macro is wrong, in every particular. NGDP and RGDP are not connected by a linear projection. Inflation is not a linear projection. RGDP and NGDP do not have the same slope. Inflation is not a constant. I can’t even parse what you think you mean by “Not constant inflation but the constant, inflation“. How is something both a constant and not a constant at the same time?

    “Ex Post”, of course, everything is just a number: NGDP, RGDP, and inflation. But that doesn’t make any of them constants. They’re still (very complex) functions of moments in time. The fact that a function returns a number at a particular moment in time, doesn’t make that function a constant. (And please keep in mind that when you say “RGDP and NGDP have the same slope”, that “slope” is not something which can happen at only a single point in time. Slope is a transition between times. But inflation is not a constant between times.)

    Words mean things, Ray. You don’t get to make up your own definitions of existing words. The way you put them together, the sentences mean false things.

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