Category Monetary policy
The collective speed limit game
Neo-Fisherite fun. Plus concrete steppes fun. 1. Suppose you don't care what speed you drive. Anything between 0 and 200 is all the same to you. But the cops do care what speed you drive. They want you to drive at exactly the speed limit S*, neither faster nor slower. (They have a symmetric target.) […]
Black holes and Neo-Fisherites are a monetary phenomenon
Suppose you live in a Neo-Wicksellian economy, where the central bank sets a nominal rate of interest. Black holes are a theoretical possibility. Nominal demand for goods can spiral down to zero, if people expect it to. And white explosions are a theoretical possibility too. Nominal demand for goods can spiral up to infinity, if […]
Neo-Fisherites again: Schmitt-Grohe and Uribe
I was scared of reading Stephanie Schmitt-Grohe and Martin Uribe's paper (pdf). All I knew was that it was a technically demanding paper, and that it had the "Neo-Fisherite" result — if the central bank increased the rate of interest, inflation would rise. I have now read it. Sort of. I think I now understand […]
Neo-Fisherites and the Scandinavian Flick
Noah Smith wonders if "reality might topple a beloved economic theory". Well, if you look at Sweden, reality just confirmed that beloved economic theory. The Riksbank raised interest rates because it was scared that low interest rates would cause financial instability. Lars Svensson resigned in protest. Then inflation fell, and the Riksbank needed to cut […]
Making two macroeconomic fallacies true
This will be a confusing post, because I'm writing it to try to get my head clear on something. And it's still not clear. There are no answers here: only questions, and strange thoughts. 1. Lots of people believe the Inflation Fallacy: "Inflation makes us worse off because a 1% rise in prices means we […]
Will somebody please think of the Data Generating Process!
Or: "Should Finance People be allowed out unaccompanied by a macroeconomist?". If the central bank is doing its job right, monetary policy ought to appear to be irrelevant. The Economist says (HT Mark Thoma) "Interest rates do not seem to affect investment as economists assume", and this means that monetary policy is irrelevant. (Let's just […]
John Cochrane’s “Monetary Policy with Interest on Reserves”
I am going to give what I think is the intuition behind John Cochrane's paper (pdf), that is the subject of his recent post. (Or maybe what I'm doing is reverse-engineering his model's results.) The key result of his paper is the "Neo-Fisherian" finding that an increase in the rate of interest set by the […]
“Inflation derps” are people from the concrete steppes
Suppose I lend you $1,000, at 0% interest. But I warn you that as soon as you spend that $1,000, or lend it to someone else to spend, I will immediately make you repay the loan, or else raise the interest rate high enough to make you regret spending it or lending it. You will […]
Sign wars, and stability, with price level targeting
Suppose, just suppose, that everyone knows that the price level will be exactly 100 in 2084. (That's 70 years from now, to keep the math simple). Because in 2084 the central bank will redeem all the outstanding notes, in exchange for real goods, at a price of 100 notes per real good. And will then […]
Dumb questions about forward guidance in New Keynesian models
I feel I ought to know the answer to this question. But I don't. Suppose that demand this period Y(t) depends on the interest rate this period r(t), and on the expected interest rate next period E[r(t+1)], and on a vector of other stuff X(t). Y(t) = D(r(t), E[r(t+1)], X(t)) where D1 < 0, D2 […]
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