Interview verbalize as well as slides

I did an interview alongside Cloud Yip at Econreporter , Part I together with Part II , on diverse things macro , coin , together with financial theory of the cost level. It's role of an interesting series on macroeconomics. Being a transcript of an interview , it's non equally build clean equally a written seek , but non equally incoherent equally I commonly am when talking.

On the same topics , I volition survive giving a speak at the European Financial Association , on Fri , titled  "Michelson-Morley , Occam together with Fisher: The radical implications of stable inflation at the nada bound ," slides here. (Yes , it's an development of before talks , together with hopefully it volition survive a newspaper inwards the fall.)

And , also on the same topic , you lot mightiness detect useful a prepare of slides for a 1.5 hr MBA course of study roofing all of monetary economic science from Friedman to Sargent-Wallace to Taylor to Woodford to FTPL.  That likewise should larn written downward at simply about point.

The speak incorporates something I simply figured out final calendar week , namely how Sims' "stepping on a rake" model produces a temporary spend upwardly inwards inflation later an involvement charge per unit of measurement rise. Details here. The telephone substitution is uncomplicated financial theory of the cost marker , long-term debt , together with a Treasury that stubbornly keeps existent surpluses inwards house fifty-fifty when the Fed devalues long-term debt via inflation.

Here is actually uncomplicated example.


Contrast a perpetuity alongside i catamenia debt , together with a frictionless model. Frictionless agency constant existent rates together with inflation moves i for i alongside involvement rates
$$ \frac{1}{1+i_t} = \beta E_t \frac{P_t}{P_{t+1}} $$
The financial theory equation , existent value of authorities debt = acquaint value of surpluses ,  says
$$\frac{Q_t B_{t-1}}{P_t} = E_t \sum \beta^j s_{t+j}$$
where Q is the bond cost , B is the publish of bonds outstanding , together with sec are existent principal surpluses. For i catamenia debt Q=1 always. (If you lot don't run into equations higher upwardly or flick below , come upwardly dorsum to the master copy here.)

Now , suppose the Fed raises involvement rates , unexpectedly ,  from \(i\) to \(i^\ast\) , together with (really important) in that place is no modify to financial policy \(s\). Inflation \(P_{t+1}/P_t\) must fountain at i time upwardly next the Fisher relation. But the cost marker \(P_t\)might fountain too.

With i catamenia debt , that can't occur -- B is predetermined , the correct side doesn't modify , hence \(P_t\) can't change. We simply ramp upwardly to to a greater extent than inflation.

But alongside long-term debt , whatsoever modify inwards the bond cost Q must survive reflected inwards a fountain inwards the cost marker P. In the instance , the cost of the perpetuity falls to
$$ Q_t = \sum_{j=1}^\infty \frac{1}{(1+i^\ast)^j} = \frac{1+i\ast}{i^\ast}$$
hence if nosotros were expecting P nether the master copy involvement charge per unit of measurement i , nosotros at nowadays have
$$\frac{P_t}{P} = \frac{1+i^\ast}{1+i} \frac{i}{i^\ast}$$
If the involvement charge per unit of measurement rises permanently from 5% to 6% , a 20% ascent , the cost marker jumps downward 20%. The pasty cost version smooths this out together with gives us a temporary disinflation , but together with hence a long run Fisher ascent inwards inflation.

Do nosotros believe it? It relies crucially on the Treasury pigheadedly raising unchanged surpluses when the Fed inflates away coupons the Treasury must pay on its debt , hence all the Fed tin arrive at is rearrange the cost marker over time.

But it tells us this is the of import interrogation -- the dynamics of inflation next an involvement charge per unit of measurement ascent depend crucially on how nosotros remember financial policy adjusts. That's a vastly dissimilar focus than nearly of monetary economics. That we're looking nether the incorrect couch is big tidings yesteryear itself.

Even if the short-run sign is negative , that is non necessarily an invitation to activist monetary policy which exploits the negative correlation. Sims model , together with this i , is Fisherian inwards the long run -- higher involvement rates eventually hateful higher inflation. Like Friedman's instance of adjusting the temperature inwards the shower , rather than fiddle alongside the knobs it mightiness survive meliorate to simply prepare it where you lot desire it together with wait.