Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Wednesday, July 21, 2010

Money and Inflation

One of the ideas that stuck in my head as an undergrad was the proposition that "inflation is always an everywhere a monetary phenomenon."  The idea is usually formalized by way of the Quantity Theory of Money (QTM) -- or more precisely -- the Quantity of Money Theory of the Price-Level. (QTM is not a theory of money, it is a theory of the price-level).

In its simplest version, the QTM asserts that the equilibrium price-level is roughly proportional to the outstanding supply of money (however defined). As inflation is the rate of change in the price-level, the phenomenon of inflation is attributed primarily to excessive growth in the money supply (typically viewed as being controlled by the monetary or fiscal authority). Stories of interwar hyperinflations and tight correlations between secular or cross-section plots of inflation against money growth is likely what cemented the idea in my head. As the teaching assistant was fond of telling us: "Inflation is caused by too much money chasing too few goods." Well, duh.

Alright then, let's consider the following data, which plots the evolution of base money (money created by the central bank only) since 2005. No, this is not is the United States. Since the fall of 2008, the Federal Reserve has more than doubled the supply of base money. Yikes! Is it time to buy gold and guns?

Well, maybe. Or maybe not (not yet, anyway). As the next figure shows, there is something conspicuously missing from the QTM story...where the heck is all that predicted inflation?

As Ron Paul is fond of stressing (ad nauseam) , the Fed creates (base) money out of thin air! It's a puzzle that intrinsically useless fiat can possess market value in the first place. But given that it does, it is even more puzzling that doubling its supply does not halve its value (double the price level). What's going on here?

The answer is that there are a lot of things going on. I can't possibly talk about everything in one post, so let me focus on one thing here. The idea is this: perhaps the Fed is not simply creating money "out of thin air."

The first figure above shows the evolution of the size of the Fed's balance sheet (liabilities) over time. The following link shows the composition of the Fed's balance sheet (asset side) over time: see here.

Normally, most of the Fed's assets are in the form of U.S. treasuries (promises to pay future dollars). The Fed is currently holding about the same amount of treasuries as it did prior to the financial crisis. The doubling of assets we see today is attributable almost entirely to the Fed's purchase of agency (Fannie and Freddie) debt in the form of mortgage-backed securities (MBS).

The first thing to stress is that the MBS purchased by the Fed did not consist of existing "toxic" assets. The purchases consisted of new-issues; that is, the highest rated mortgages made after the substantial decline in house prices. Moreover, it is my understanding that these products are essentially guaranteed by the Treasury. And indeed, the income generated by these purchases (rate of return roughly 5%) is in large part what allowed the Fed to remit an additional $25 billion to the treasury last year; see here.

Question: what sort of "bail out" generates $25 billion for the U.S. taxpayer?

So you see, the Fed did not simply create new money out of thin air. It created the money out of your mortgage, which in turn, is an income-generating security backed by a real asset (your home).

Now, we might all agree that creating fiat money and distributing it willy-nilly throughout the economy (helicopter drops) is ultimately inflationary. But this is not what is happening. It is by no means clear to me that an asset-swap of this form (money for MBS) is intrinsically inflationary. It all depends.

What does it depend on? Well, above all, it depends on the underlying quality of the assets backing the MBS. If these prime mortgages start to default en masse, then we have a de facto helicopter drop of cash, and this will be dilutive.

An analogy to keep in mind here is that of a company, say Microsoft, financing the purchase of new capital (say, a takeover of some smaller firm) by issuing new equity. New shares are created "out of thin air." But is the new share issue dilutive (would it depress the purchasing power of existing shares)? The answer is that it depends. If the acquisition is accretive, then share value is likely to increase (the effect is deflationary). On the other hand, if the acquisition turns out to be a bust, the new share issue will be "inflationary."

Note: one may want to argue that an increase in the supply of shares is not the same thing as an increase in the supply of Fed cash; the latter is relatively liquid (it circulates widely as a medium of exchange). But imagine that Microsoft shares also circulated widely as a medium of exchange...would this fact alone imply that the new share issue described above is necessarily dilutive? Money, like equity, is an asset; and its value (purchasing power) depends primarily (though not exclusively) on what backs it.

To sum up, the QTM may not be the best way to organize one's thinking about the link between money and inflation. If you'd like to explore this idea further, I recommend that you take a look at Bruce Smith's interesting piece: Money and Inflation in Colonial Massachussets. Here is the abstract:

This article argues that the quantity theory of money is not supported by the evidence. Contrary to the quantity theory, the article says, the value of money depends primarily on how carefully it is backed. That is, the rate of inflation depends more on underlying fiscal policies than on rates of money growth. The evidence for this argument comes from a close look at the way in which the colony of Massachusetts ended a severe long-term inflation in 1750. Other British North American colonies endured similar episodes, all of which parallel some periods of severe inflation in the 20th century United States. The 18th century
evidence thus contains lessons for modern monetary policy.

Further reading: Money as Stock (John Cochrane).


  1. David,

    Good post. I have to think about it some more. I think your thoughts on inflation and money parallel some of the Austrian writings (who are definitely not monetarists).

    Anyway, I did want to a point. Inflation as a general increase in prices is really vague. The most common proxy for inflation is the CPI. Despite its technical failings as an economic measure, it also causes people to think inflation has to show up in consumer goods. This is not true. There can also be asset price inflation - what are often referred to as bubbles, although having studied rational and speculative bubbles, I never like to use that word. Extension of credit for specific purposes (mortgages, say) is too much money chasing too few of a specific good - causing asset price inflation. It wouldn't, nor does it have to, show up in consumer prices in general.

    The second thing is that any money that is created does have to circulate. If it is just held as bank reserves, it can't get into the economy. Based on H3 data (from the Federal Reserve), non-borrowed reserves are still a huge portion of total reserves - which have never been higher. I've not looked into how banks are using the reserves; I imagine they could use them to support new loans, right? But anyway, it doesn't seem that the money is circulating.

  2. Good post. Got me thinking. Some comments.

    1. As mentioned above by Prof J, and to be fair to the QTM, we should use currency in circulation or M1/M2 (none of which includes bank reserves). The "jump" in currency in circulation is an order of magnitude lower than in the monetary base.

    2. The CPI series in your sample is significantly affected by the price of oil (in particular, the hump in 2008), which has nothing to do with monetary policy. If you look at CPI without energy prices, you see a steady increase throughout your sample period (2005-2010), although at a decreased rate starting in late 2008.

    3. The notion of asset-backed fiat money creation is intriguing and deserves further exploration (I'm sounding like a referee now!). However, why doesn't it work with standard open market operations? When the Fed buys debt with money, there is a real counterpart, which is the reduction of future taxes to finance the debt. It's still inflationary by standard arguments. So maybe the key in the current situation is simply that the new money created remained in the financial sector and is not "chasing goods". I.e., there was an increase in the demand for money balances. Banks got a good deal by swapping assets they would rather not have (ABS) for a safe and interest bearing asset they seem content to hold (bank reserves). You may have a point though as one has to wonder what would happen if those ABS ended up having a very low value (which would get as closer to an unbacked monetary expansion).

    4. The paper by Bruce Smith looks interesting. I think his argument is (at least partially) captured by modern monetary models with utility-maximizing agents. The demand for money reacts to future government policy (both fiscal and monetary) and all sorts of behavior is possible. This property is perhaps obscured by the fact that monetary theorist mainly focus on fixed (constant) policies.

  3. Prof J: Thanks.

    Your first point is a good one, although I'd be interested to know what you recommend as a better measure of the price-level. Also, extension of credit (say by banks) is not inflationary if the asset it finances is accretive, as in my example.

    On your second point, I'm not exactly sure. The price of an asset can easily depreciate even if it does not circulate.

    Fernando: Thanks.

    [1] Yes, I was aware of that. On the other hand, QTM types like to view the money supply as "exogenous," and M1/M2 is most certainly not exogenous.

    [2] Sure, you are right. But I think that my basic point hold regardless of the price level measure one uses. Let me know if I'm wrong!

    [3] It does (or at least, can) work with standard open market operations. It all depends on how fiscal policy interacts with monetary policy. See Neil Wallace, "A Modigliani-Miller Proposition for Open Market Operations."

    [4] No, it is obscured by the fact that almost no one takes monetary theory seriously. NK models, for example, typically abstract entirely from money (although this is changing, owing to recent events).

  4. David,

    I'm reading Cochrane's paper. Very interesting - thanks for posting.

    You are right about the credit extension. I was not careful - it actually seems to be a question of degree. I study the LBO market fairly carefully. This is a market with a limited supply of good potential firms to purchase and take private, but it is also a very attractive market for investment. It follows a pattern whereby early investments usually work out very nicely, and returns are quite satisfactory. This brings in much more investment, and LBOs are financed mostly by debt, and syndicated loans are the preferred form. My research tells me that the price paid for a given firm (or level of cash flows, if you will) increases as the LBO market gets more populated by investors. I think this is because the credit available gets out ahead of the number of targets to purchase, because the targets are a slow-growing, or even fixed, amount. I'm making a long-winded point that this isn't a binary sort of thing - it's a matter of degree.

    On inflation measures: I was actually thinking about a similar issue today. Many people put a lot of stock in one or two measures. For example, GDP is the common measure for the well-being of a country. CPI is the common measure for inflation. I think this is wrong. Not because these measures don't tell us something interesting, but because no one measure is everything. Economics (and my thing, finance) are forced to use proxies, because most things we're interested in can't be measured directly. So, to answer you: I think CPI is a reasonable place to start, but I also like PPI, asset price indices (stock market indices, for example) and a variety of individual price series. It's a good idea to keep an eye on basic commodity prices, for example.

    Maybe I'm too verbal. I like to use all the numbers to get a gooey understanding of what's cooking. Doesn't always play well in the research, I've noticed...

  5. David:

    Agreed on [1]. Your point about QTM taking supply as exogenous can (sadly) also be made about demand. Still, no reason not to use the proper data series.

    Neil's result appears to hinge on fiscal policy being constant (I still need to read the paper carefully), so does not seem applicable to my argument.

    To further evaluate your main hypothesis consider this alternative experiment: instead of swapping banks assets, swap private agents' assets. The swap is akin to a capital levy, so it's non-distortionary. By your argument, if the Fed was swapping assets of good quality, this policy would not be inflationary as the new money would be backed by real assets. But why would agents want to hold on that extra cash? Unless you appropriately compensate them (which is what the Fed did by paying interest on bank reserves), they will not and a price increase results. Of course, there will be a mitigating effect due to lower future deficits (which will now be partially financed with the return on swapped assets), but this is second-order.

    My point is that what "backs" new money is a corresponding increase in the demand for real balances.

    Another example that comes to mind is a currency board. Does it imply low inflation because local currency is backed by some strong foreign currency or because you can only expand the money supply when agents come to the central bank and buy it with foreign currency? I.e., is it the real-asset backing or the demand regulating supply that preserves the value of the currency?

  6. David:

    1. The modern (i.e. last 40? years) QTM says that the price level is determined by both the current *and the expected future* supply of money. If the former rises, but the latter falls, the net effect can go either way. Nobody expects the current increase in Ms to be permanent. (Plus it's also determined by the demand for money, of course).

    2. "Backing" matters only insofar as it influences future money issuance (or interest on money, if applicable). Same for shares of course, where Microsoft's acquisition would lower share prices if the shareholders never expected to see any of the returns from that acquisition in the form of higher dividends or share buybacks.

    3. But for money, unlike shares, there is no promise or guarantee that the moneyholders, unlike the shareholders, *will* see those returns. Most get handed over to the government. Money is like a closed end mutual fund, *except* all the profits from the assets held by the fund go to the government. Which means it is not at all like a mutual fund. Any normal closed end mutual fund which promised to pay all its profits to the government would find its shares unmarketable.

    4. The fundamental value of a share equals the NPV of expected returns. The Bank of Canada promises a negative 2% real return on its shares. Do the NPV calculation with a negative r. It's undefined. The little number at the end does not converge to 0 as time goes to infinity.

    5. The fundamental value of a share equals the NPV of expected returns. But for a share, the r used in the NPV calculation is market-determined, and is exogenous to the quantity of shares outstanding. That is not true for M. The rate of return at which people are willing to hold M varies inversely with M/P. People are willing to hold some M/P even at Zimbabwean rates of inflation. So the NPV calculation cannot even be defined without a money demand function relating M/P to r.

    6. IIRC (and it was decades ago I read that paper) Bruce Smith was talking about a period with fixed exchange rates. So the supply of M was endogenous. But the QTM is talking about the effects of exogenous shocks to Ms.

    7. Money, as medium of exchange, really is special. People are prepared to pay to hold it. It is ror dominated by other assets.

    8. Ahhh! You younger generation of UWO grads (shakes head)!

  7. Prof J: agreed.

    Fernando: I cannot disagree with what you have said here (except, I encourage you to read Wallace more carefully). You asked "why would agents want to hold onto that extra cash?" I left out an important dimension to the current story: there was a massive increase in the demand for that cash (flight to quality). This is related, I suppose, to your comment that it is the increase in money demand that backs the extra cash. That's a loose statement, but I know what you're getting at.


    [1] Agreed. Although, I think I'm trying to argue that even if people thought that the increase in M was permanent, that it need not have any effect on the price-level, assuming a bunch of other stuff about backing and fiscal policy, etc.

    [2] I'm not sure I agree with you entirely here. Imagine that the new acquisition is a giant gold brick (which generates zero income). If Microsoft purchases the gold brick at market price, the new equity issue is neither accretive nor dilutive. Of course, this assumes that Microsoft shares can be redeemed for gold (the new share issue is backed in this manner).

    [3] I see where you are going with this, and maybe you are correct, but I am not entirely persuaded. Your mutual fund example is correct as a practical matter, but not as a theoretical matter. Imagine, for example, that your fund was the only agency capable of producing non-counterfeitable small denomination paper notes. These notes may still be marketable, even if all profits are remitted to the government.

    [4] Assets with varying degrees of liquidity are valued beyond their fundamentals. You're not going to disagree with this. I guess you are trying to tell me that money is different than shares; it has a higher liquidity premium. I'm not going to disagree. Have you read the Wallace paper--having a model in front of us would help sharpen the discussion.

    [5] OK...(I think...I need a coffee!)

    [6] Not sure if fixed exchange rates has anything to do with the argument (will have to think about it).

    [7]True, money is a medium of exchange (a tautology, in my view). But money is also an asset and, as such, its value may be influenced, at least in part, by all the sorts of things one normally thinks might influence an asset price.

    [8] I'm counting on you old fogies to keep us "young" whippersnappers in shape!

    Great comments everyone. You have made me realize that I need to step back and organize my thinking more clearly on this matter...

  8. The theory that the money supply determines the price level has an even more basic flaw: it ignores the impact of the velocity of money on the price level.

    The price level is determined by supply and demand. Demand = the total of all spending = money supply * velocity of money. In other words the money supply is only half the equation; the other half is how quickly each dollar gets spent after it is received. If you double the money supply, but the velocity of money drops 50% the price level will be stable. What could cause the velocity of money to drop? People deciding to save more than they did before. Banks deciding to lend less than they did before. Businesses deciding to invest less than they did before.

    Apply this to the classic helicopter drop example. Imagine that you drop $1,000 in the front yard of every household in America. Aren't prices automatically going to rise? How about if the package with $1,000 comes with a leaflet saying there is a 10% chance the household will become unemployed in the next few months, and that their house just lost 30% of its value? Is the helicopter drop still going to cause the price level to rise? Or are all those packages going to be taken inside and stuffed under the mattress and have no impact on prices at all?

  9. AndyfromTuscon:

    As Nick Rowe has pointed out, more general versions of the QTM do endogenize velocity.

    (Although, I'm not sure that velocity, as it's normally defined, has anything intrinsically to do with the "speed with which money circulates." Usually, one defines V = P*Y/M. So anything that increases the demand for money (as an asset) will cause V to drop (even if the asset does not circulate).

    Also, in reply to your last paragraph, I agree (see my reply to Fernando). Thanks!

  10. David: 3&4. The required rate of return on an asset will depend on its liquidity. If the shares in some particular mutual fund are unique in some way, and so provide a special kind of liquidity, and that particular mutual fund has some degree of monopoly power on providing that sort of liquidity, then there will be a downward-sloping demand curve for those shares, so the real quantity demanded is an inverse function of the rate of return differential. So we would need a quantity-theoretic approach to explaining the value of those shares. The NPV approach only works if the demand curve is horizontal. The NPV approach can allow an exogenous liquidity premium, but cannot allow that liquidity premium to vary inversely with the real stock of shares held.

    Suppose that "bling" is an asset. People get utility from wearing it, but their utility depends on the value of bling worn (because people want to flaunt their wealth). And one firm (De Beers?) has a monopoly on producing bling. I would adopt a quantity-theoretic approach to the value of bling. We could even assume that bling is the medium of account. In which case we would have a bling theory of inflation.

    7. But we would not have a bling theory of general gluts. An excess demand for bling (suppose prices are sticky in terms of bling) would NOT cause a recession. It would only be if bling were also used as a medium of exchange that an excess demand for bling would screw up all the other markets, because bling would trade in every market. The medium of exchange really is special.

    I can't remember if I've read that Wallace paper. I read a lot of Real Bills stuff a couple of decades back. Decided it was all about expectations of the future money supply. And their simple models only worked with a perfectly elastic Md curve. (They're liquidity trap guys, just like Paul Krugman ;-) )

    1. If I assume the increase in M is expected to be permanent, that assumption says all we need to know about "backing" and fiscal policy regime. Backing and the fiscal regime matter only insofar as they affect expectations of future money supply (I'm ignoring payment of interest on money). Once you assume the increase in money is permanent, that takes away a degree of freedom from your assumptions about the fiscal regime.

    A 2 for 1 stock split is a permanent increase in the supply of shares (with no change in future dividends or buybacks). "Backing" is just a weird way of talking about the future money supply.

    8. I'm getting too old and tired! Gotta try to lick you kids into shape soon, or it'll be too late!

  11. My old post on "money as bling":

  12. Nick: What are you trying to do with me? I've got work to do here! But seriously, I love your "money as bling" thing...give me some time to absorb the argument fully and mull it over. Thanks!

  13. 6. Under fixed exchange rates, where Ms is endogenous, *all* changes in the stock of M must be due to changes in the demand for M. So you cannot use what happens there to disprove the QTM, because the QTM (or QTP, as you validly argue it should be called) is about the effect of a change in Ms.

    If you want to find the equivalent to the QTM thought-experiment of a doubling of MS, only under fixed exchange rates, this is it: it's a permanent 50% devaluation.

    Here's my own generalised version of the QT: whatever nominal variable the central bank is fixing (Ms, price of gold, exchange rate, whatever), if you permanently double it, all other nominal variables will double too.

  14. Two more random thoughts:

    I really like your calling it QTP rather than QTM. You are dead right. And my "generalised version of the QT" only reinforces that, because my generalised version is a QTP, but no longer a QTM.

    Even though I reject the "Real Bills" approach, it really did force me to think far more deeply about money, and the QT. What *was* the difference between money and shares? You can learn a lot from a good clear mistake.

  15. David and Nick,

    Here is Sargent's latest paper. I've only just gotten into it, but he's talking about Real Bills doctrine. Thought you might be interested.

  16. David

    This comment came in a post on the QTM over at Bill Mitchells place.
    The comment was a quote of Joan Robinson.

    “I have found out what economics is; it is the science of confusing stocks with flows” (see Robinson, “Shedding Darkness”, Cambridge Journal of Economics, 6 (1982), 295-6). She adds that “it is this confusion that has kept the Quantity Theory of Money alive until today. By applying V, velocity of circulation, that is turnover say per week or per year, to M, the stock of money used in transactions in a given market, we arrive at the flow of transactions in the market concerned”. She then goes on to point out that there is a mystery about the formula. “MV is the flow of transactions per unit time in terms of whatever currency is used for these transactions, but what is the unit represented by MV/P-transactions in real terms?”
    Joan Robinson’s question hits the nail on the head. If you can’t name the unit then scrap the formula. And that’s before we get to serious economic objections!"

    What say you?

  17. I rear lot of articles but yours is the best one i have seen forever.I really happy to visit this type of post.


  18. gbgasser:

    I am not exactly sure what Joan Robinson is saying here. It sounds like she is complaining about the problem of defining things like "a unit of aggregate output." (relatedly, the old Cambridge controversy). Of course, the same thing could then be said about M and P. Aggregation into indices constitutes a problem, but whether it is a signficant problem for the question at hand needs to be demonstrated by the critics.

    What say you?

  19. Inflation was always there. it is and will remain there always. it is a force in any economic system that we love and hate both in the same era. Sometimes inflation is good and sometimes it is no goods. The situation too decides about the inflation. In some cases inflation is needed and at the same time one wants to avoid it. For it is God and for some it is devil

  20. There are several reasons that the monetary inflation depicted in that chart haven't manifested in the CPI:

    1) Both headline and core CPI are "cooked" in order to lower government entitlement checks. Using the pre-Clinton era formula for CPI shows that inflation has been dramatically understated. The government uses hedonic regression to further deflate the index. See for more info.

    2) Much of the inflation is exported as the US dollar enjoys the status of world reserve currency. My theory on this is based on the idea that because the US military, up until recently, enforced the exclusive pricing of oil in US dollars, thereby ensuring a global demand, much like legal tender and income tax serves to create domestic demand. The emergence of the Iranian oil bourse which accepts Euros for oil is another signal of the dollars's demise, in my opinion.

    3) Basic measures of inflation don't include asset prices. Prices are simply ratios, the antecedent being US dollars. Since we know the law of supply and demand isn't suspended for the consequent as it pertains to the equilibrium price, we can assume it isn't for the antecedent either. The endless cycle of Fed-induced asset bubbles bears this out clearly.

    4) As your teaching assistant said, "Inflation is caused by too much money chasing too few goods." The United States is not Zimbabwe. The price level doesn't reflect your monetary base chart in part because of the incredibly productive US economy. No matter how much the government can consume by issuing debt and funny money, the country, at least for now, produces more. This doesn't change the confiscatory nature of the inflation tax, but it does serve to obscure it, along with the other three reasons.

  21. In other news, your spam filter appears to be triggered when someone puts a URL in their profile.

  22. Tippit:

    [1] There may be something to this. I am not an expert on the construction of index numbers. I plan to check that site out, thanks.

    [2] I would phrase it differently. I would say that one important force that is keeping a lid on US inflation is the rapid growth in the world demand for USD and US treasuries. But so what? The Fed and Treasury are simply accommodating world demand for US debt. Without this accommodation, deflation is the likely scenario. Whether that's good or bad can be debated, of course.

    [3] Should basic measures of inflation include asset prices? It depends on what one wants to measure. There is an index for every purpose. Economic theory suggests that people care about consumption, now and in the future. CPI is definitely relevant, but may not be the only index of interest.

    [4] The "confiscatory" nature of the inflation tax. You mean, in relation to other "non confiscatory" taxes levied by Congress?

  23. The problem with not including asset prices in the inflation metric, is that their absence obscures the punitive effect of Fed-subsidized assets on those who don't own the assets in question. If Goldman Sachs offers me twice for my bond what they would have otherwise because of the Fed's low rate policy, it represents an arbitrary transfer of wealth from money-holders to bond-holders.

    With regard to point four, conventiontal taxes are no less confiscatory, but the inflation tax is more *regressive*. You have claimed in previous blog posts that few people save non-interest bearing paper. While that is true, where does it all go? It doesn't magically disappear, it's held by someone, somewhere, at all times, even if it is treated like a hot potato. I would submit that it is is the poorest who end up holding the most of this paper, and they are the ones who pay the tax, in the form of depreciated cash and salaries, and in bank accounts with negative real interest rates.

    Another concept that I think you have confused with regard to the inflation tax, is the idea that its scope is limited to higher consumer prices. In fact, given the productivity of the US economy, even if we had a 0% rate of CPI inflation, and assuming the CPI wasn't manipulated, the tax would still be manifest in the form of an opportunity cost - consumers would have otherwise paid lower prices for consumer goods absent the consumption paid for by the fiat money.

    This is the source of controversy over what the definition of "inflation" should be, whether it is monetary expansion, or a narrowly measured and contrived index of prices.

  24. Tippet:

    A transfer of wealth from "money holders" to "bond holders." I repeat, a trivial amount of wealth is held in the form of cash. And while it is true that unanticipated Fed actions on the interest rate can redistribute wealth, the same is true of any shock that hits the economy. And fiscal shocks are much larger than monetary shocks.

    There is surely a regressive element to the inflation tax, since the poor frequently do not have bank accounts. But up until recently, banks earned zero interest on their cash reserves too. And the underground economy is a huge user of cash; perhaps we do want to tax that activity? And finally, a lot of cash is held by foreigners. All added up though, seigniorage revenue is tiny in proportion to other revenue sources for the US government.

    On your last point, many modern monetary models suggest that a moderate deflation is a good thing. So no argument there. However, the same models also suggest that the welfare gains are small.

    Why are you getting your knickers all in a knot over monetary policy? The 800lbs gorilla in the room is the Congress/Treasury.

  25. I've responded and yet my comments aren't being posted. Are you now censoring your blog?

  26. Tippit: I am not censoring my blog. I do not know what is happening to your comments. They do not even appear in my spam box.

    If all else fails, email your comment to me and I will post it for you.