tag:blogger.com,1999:blog-8702840202604739302.comments2024-03-12T22:00:25.991-07:00MacroManiaDavid Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger4982125tag:blogger.com,1999:blog-8702840202604739302.post-18919976957365689172024-02-10T07:20:41.856-08:002024-02-10T07:20:41.856-08:00What if we add distribution to the model? Suppose ...What if we add distribution to the model? Suppose there are two kinds of households. Let’s call them spenders and savers, in honor of Greg Mankiw. Suppose “savers” roll any marginal income they receive into bank deposits (earning FFR) or Treasuries. Spenders but newly produced goods and services.<br /><br />Then the degree to which higher rate levels will constitute a kind of baseline stimulus will depend upon the degree to which Treasuries and bank deposits are already held by savers. In extremis, if all Treasuries and bank deposits are held by savers, there will only be the conventional effect, as spenders are deterred by high borrowing costs.<br /><br />In general, monetary policy is more predictable and straightforward (conventional) when wealth inequality is high (as the distinction between spenders and savers is likely savers are rich). High interest rates then aggravate wealth inequality, and interest compounds inertly within the bank accounts of the rich (and converts marginal spenders to savers).<br /><br />So interest rate policy might simultaneously “work” in the conventionally expected way, and aggravate wealth and more broadly social stratification.<br /><br />Maybe it’d be better if it didn’t work.Steve Randy Waldmanhttps://www.interfluidity.com/noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-80725644144820420062024-02-09T16:03:24.280-08:002024-02-09T16:03:24.280-08:00What role does QE play? Should the Fed build its b...What role does QE play? Should the Fed build its balance sheet?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-68367147586142217922024-02-09T08:51:23.455-08:002024-02-09T08:51:23.455-08:00Hey David, nice post, and thanks for the shout-out...Hey David, nice post, and thanks for the shout-out :)<br /><br />Is Ricardian vs. Non-Ricardian really the issue though? My position is that, given the way that fiscal policy works in reality, it is basically impossible for fiscal policy to be Non-Ricardian. What I mean by that is, to the extent that the government issues liabilities only (or at least primarily) by buying goods and services, it is simply unable to issue liabilities that the public does not expect to be redeemed, because private agents would just choose not to sell goods to the government. As a result, a) the intertemporal government budget constraint cannot *not* hold, b) therefore people today always *expect* it to hold, and c) therefore if the debt increases, that is always met exactly 1-for-1 with expected future surpluses, and actual future surpluses (where at worst, private actors choose to sell less to the government in the future, driving the government's budget into surplus). <br /><br />In my model of MMT's price level determination story, I explicitly model the private sector's decision to sell goods to the government, and so this comes up there: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4234562. (Though that model has a fixed exogenous price level, so not maybe so relevant for your question here.)<br /><br />Anyway, all that said, I take the point that it may come down to differing assumptions about how the fiscal authorities react. <br /><br />Finally, can you say a little more about the mechanism involved here? The way I see it, if a one-time permanent increase in the interest rate reduces Investment spending (and ignoring the fiscal issue), it would do so on a permanent basis. Then if inflation was driven by the gap between capacity and demand, that would be a permanent reduction in the rate of inflation. Why, in your model, does the inflation rate recover?Sam Leveynoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-24711279417362831522024-02-09T08:47:19.236-08:002024-02-09T08:47:19.236-08:00Counter-intuitive but thought provoking. Current...Counter-intuitive but thought provoking. Currently, it is interesting to observe yield curves of income instruments remain inverted as they have been for quite some time now.<br /><br /> Could markets be anticipating yet another policy-driven negative global supply shock and some impact on measured inflation? Moreover, most macro models by necessity blithely assume stable property rights regimes and ignore long-term trends such as hegemonic decline which is generally excruciatingly slow with only the odd agonizing moment. Erik Poolehttps://www.blogger.com/profile/02442592238782846163noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-24324276095040286482024-02-09T07:23:36.214-08:002024-02-09T07:23:36.214-08:00Brilliant as always. And you didnt say "Fis...Brilliant as always. And you didnt say "Fisher" once! @ElpinorFollyhttps://www.blogger.com/profile/00158477037189661959noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-57386443221117018172023-07-19T08:52:38.176-07:002023-07-19T08:52:38.176-07:00One minor caveat about supply-side constraints. P...One minor caveat about supply-side constraints. Pandemic lockdowns (at home and abroad) started in March 2020 and were not dismantled in most U.S. states until April 2021. That unleashed a lot pent-up demand for formerly prohibited purchases such as travel, and also for larger homes with work-at-home office space, and for upgraded new or used cars to finally hit the road. Combined with excess savings, including stimulus checks, this created a perfect storm of extremely high demand for goods and services in short supply. A lot of production that was stopped in 2020, due to regulations or sectoral deflation, could not simply be turned on like a like switch -- notably oil wells and refineries, or Broadway shows. Bankrupt stores, restaurants, golf courses and gyms could not always be reopened quickly. <br /><br />"Excess demand" always means relative to supply. And The supply side of excess demand remained a very real problem in 2021 and even 2022. <br /><br />$5.1 trillion of 2020-21 stimulus spending seems a better explanation of the simultaneous demand-side spurt of consumer demand (and the 8.5% CPI inflation from April 2021 to June 2022) than low central bank rates. Few households needed to borrow because their savings were stuffed with helicopter money. <br /><br />Alan Reynoldshttps://www.blogger.com/profile/03322477711116513830noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-73426047106000375342023-07-18T08:03:10.690-07:002023-07-18T08:03:10.690-07:00Sure. Then size of balance sheet relative to size ...Sure. Then size of balance sheet relative to size of the economy would just shrink over time. We could go back to a corridor system one day! David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-12364949554282801742023-07-17T16:32:21.011-07:002023-07-17T16:32:21.011-07:00I think I agree.
Side question: Should the Fed ho...I think I agree. <br />Side question: Should the Fed hold onto its balance sheet?Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-3211577499584294182023-03-20T22:49:14.660-07:002023-03-20T22:49:14.660-07:00Sounds reasonable to me! Sounds reasonable to me! David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-33245531738849185142023-03-20T17:37:19.685-07:002023-03-20T17:37:19.685-07:00Ideal solution would be a supply-side revolution i...Ideal solution would be a supply-side revolution in the areas we need it most: housing, healthcare, education. Unclear how politically feasible that is. Also unclear if DC is capable of anything even remotely sophisticated. <br /><br />I don’t see high inflation as “politically feasible.” The political barriers simply manifest later in the process when/if the electorate revolts. Regressive taxes tend to be unpopular. <br /><br />Best solution is probably a mix of difficult policies such that none dominates: benefit cuts, higher taxes, price controls, inflation. <br /><br />Most fair (but least realistic) is a one-time wealth tax. Those who most benefited from an unsustainable system should probably pay to fix it. We will of course make those who least benefited pay. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-4914174891719785932023-03-19T14:06:08.112-07:002023-03-19T14:06:08.112-07:00Thanks - makes sense Thanks - makes sense Joehttps://www.blogger.com/profile/01709995807329945280noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-7604913453785018792023-03-19T11:52:59.109-07:002023-03-19T11:52:59.109-07:00Well, I'm all ears when it comes to politicall...Well, I'm all ears when it comes to politically-feasible alternatives. What would you recommend instead?David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-2926404802133655022023-03-19T11:24:15.814-07:002023-03-19T11:24:15.814-07:00Agree, but I think you have to admit that the infl...Agree, but I think you have to admit that the inflation tax is most likely to be utilized at times when DC cannot proactively find a better solution due to political (or other) constraints. Sure, if we assume a coherent and robust set of policies, above target inflation might be a helpful component. That’s a massive assumption and history is littered with examples of the inflation tax being over-utilized (to the detriment of the weakest among us). Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-22709311939273071842023-03-19T11:17:36.551-07:002023-03-19T11:17:36.551-07:00A tax system cannot be evaluated on the basis of h...A tax system cannot be evaluated on the basis of how one of its instruments is used. Transfers to those in need should be considered part of the tax system.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-73198029352293138062023-03-19T11:14:00.902-07:002023-03-19T11:14:00.902-07:00Thanks. Point taken, though I'm OK with the wa...Thanks. Point taken, though I'm OK with the way I used the phrase (I also mentioned "social insurance"). David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-67535922566723331842023-03-19T11:11:12.734-07:002023-03-19T11:11:12.734-07:00Thanks! Correct, I'm less concerned about the ...Thanks! Correct, I'm less concerned about the difficulties the banking sector is presently experiencing. Fed might make a mistake, but I hope not. I'm much more worried about what China as an emerging global power may portend. I should like to hope for peaceful coexistence. But best case is probably a long proxy war. I don't even want to think about worse case scenario!David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-51421471466408665402023-03-19T04:26:07.104-07:002023-03-19T04:26:07.104-07:00The inflation tax strikes me as quite regressive a...The inflation tax strikes me as quite regressive and I’m surprised you’re so comfortable resorting to it. <br /><br />Most hurt are those: who don’t own a home, who are on fixed incomes, who consume 100%+ of their earnings, who are on fixed incomes, who not sophisticated enough to seek out inflation hedges, etc. <br /><br />There must be a better way to extract foreign seignorage than to bundle it with a regressive tax. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-2209402650233574762023-03-18T12:44:41.861-07:002023-03-18T12:44:41.861-07:00Very interesting, informative, and thought-provoki...Very interesting, informative, and thought-provoking post, marred only by your repeated use of the meaningless term 'redistribution' to describe policy choices. <br /><br />While there are many 'distributions' that an economy can have, there is no baseline from which a so-called 'redistribution' can occur. (Unless of course the baseline is 'individuals take what their capacity and willingness for violence will allow.')Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-14829914845129268062023-03-18T12:02:38.663-07:002023-03-18T12:02:38.663-07:00Great post. I don't fully understand the new (...Great post. I don't fully understand the new (from you) sense of pessimism in the last section. It seems more driven by proxy war than what's happening in the regional banking sector? If we put the war aside, would you say the regional banking issues while they may raise recession risks they probably won't on their own tip economy into recession because fed will offset the impact with less restrictive monetary policy?Joehttps://www.blogger.com/profile/01709995807329945280noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-86235074245723328192022-04-08T06:36:00.636-07:002022-04-08T06:36:00.636-07:00At work, basically every model must be forward loo...At work, basically every model must be forward looking and have a whole lot of other bells and whistles in order to be taken seriously, which means that practically the NK model is all that is used. <br /><br />A lot of discussions about how monetary policy works, the interaction between fiscal and monetary policy and the like can informed with really simple behavioural models (ie using such a model I found similar results to your paper on fiscal and monetary coordination), yet people prefer to simply use no models in cases where an idea can't yet be expressed in a forward looking context.themountaingoathttps://www.blogger.com/profile/16357561391694619706noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-32741520296120390832022-04-07T17:18:14.662-07:002022-04-07T17:18:14.662-07:00Thanks. I don't think this has anything to wit...Thanks. I don't think this has anything to with microfoundations, per se. It's more a question of modeling choice (micro foundations or not). The canonical NK model is not the best model in our toolkit, in my opinion. But it can be appended in ways that make it more useful. And there are many excellent scholars making good use of richer versions of the NK model. It's just not my cup of tea, for reasons that I've explained many times in the past. :)David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-18916507273433156922022-04-07T14:04:38.501-07:002022-04-07T14:04:38.501-07:00Good post. It's really a shame that the only ...Good post. It's really a shame that the only models that are taken seriously in these discussions are those that are 100 percent microfounded, because I think the transmission mechanism of monetary policy can be understood much more clearly in models that aren't forward looking. <br /><br />But instead we are stuck using models that have trouble explaining recessions, are opaque, and in which the transmission mechanism of monetary policy is ridiculous.themountaingoathttps://www.blogger.com/profile/16357561391694619706noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-20212312380086234252022-01-30T14:36:43.294-08:002022-01-30T14:36:43.294-08:00Hi David,
I think the main difference between syn...Hi David,<br /><br />I think the main difference between synthetic CBDC and the intermediated CBDC lies in the technical level. The synthetic CBDC requires two layers: The central bank money layer and the private lability layer. The intermediated CBDC only requires the central bank money layer which increases efficiency and decreases database and information transmission costs. A transfer of money between two customers who use different intermediaries requires four transactions with synthetic CBDC: One in each of the intermediary’s private ledgers and two in the central bank ledger. The intermediated one needs only the two transactions in the central bank ledger. This would also decrease the exchange of communication and transaction time because there are only three parties involved while synthetic CBDC involves four parties.<br /><br />Overall, intermediated CBDC is more efficient and therefore preferable to me. However, you can argue that synthetic CBDC can be implemented more easily. The system can be implemented with the existing technical infrastructure of central banks and e-money providers while the intermediated CBDC needs at least a new interface to the central banks plus a technical backend and frontend solution for the intermediary. This could be an option if this weights out the gains of the increased efficiency of an intermediated CBDC.<br /><br />Furthermore, I’m a bit confused how the usage of CBDC terms here differs from the usage in the broader CBDC cosmos. Isn’t iCBDC the abbreviation of the “indirect CBDC” approach (= synthetic CBDC) introduced by Kumhof and Noone in 2018? And isn’t what George Selgin means by iCBDC the same as the “Hybrid CBDC” introduced by the BIS?<br /><br />From a legal perspective I’m more or less satisfied with the following classification of CBDCs:<br /><br />Direct CBDC = Customer has access to a liability of the central bank + Customer has a legal relationship with the central bank to access its funds (e.g. bank account contract) which also regulates the issuance of the central bank money.<br /><br />Hybrid CBDC = Customer has access to a liability of the central bank + Customer has a legal relationship with a third party to access its funds (e.g. payment service contract) and a legal relationship with the central bank on the issuance of the central bank money.<br /><br />Indirect CBDC = Customer has access to a liability of an intermediary which is fully backed by central bank money (e.g. Synthetic CBDC/ Fully backed e-money/ iCBDC) OR Customer has access to a liability of the central bank + a custodian provides access to its funds (custodian contract).<br /><br />I wrote a post and paper where I go into more detail:<br />https://sites.law.duke.edu/thefinregblog/2020/08/28/regulating-central-bank-digital-currencies-towards-a-conceptual-framework/<br />Simon Hesshttps://www.blogger.com/profile/13670503378392635852noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-44843565746301344632022-01-29T16:19:22.436-08:002022-01-29T16:19:22.436-08:00Dave,
It is disingenuous of you not to mention PP...Dave,<br /> It is disingenuous of you not to mention PPP loans in your piece. Why have you neglected to mention them when trying to explain inflation. Secondly, where is the idea of excess savings?<br /><br />This piece is woefully incomplete. Address the issues in your next piece if you are serious about finding the source of the inflation. Reynmakerhttps://www.blogger.com/profile/07476475937171799011noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-88901442694302277982022-01-29T13:40:11.099-08:002022-01-29T13:40:11.099-08:00Let me elaborate a bit on the last example. Take a...Let me elaborate a bit on the last example. Take all the USD stablecloins in existence, and imagine all agree to abide by, and that the Fed allows them to abide by, a 100% master reserve balance backing requirement. As most are presently fully backed by a combination of ordinary bank deposits, Treasury's, and commercial paper, there is no reason why the new rule should clash with their basic business models, though of course it is likely to alter their earnings. (If we assume further that Fed balances earn the IOR rate, even this change needn't be all that substantial for many). Nothing would stop them from continuing to innovate, and from having to do so to remain competitive.<br /><br />Now imagine that the Fed instead abolishes all the stablecoins in favor of having an iCBDC monopoly. Bear in mind that, though private firms manage customers' holdings of iCBDC, it remains a Fed product, not their own, over which it presumably would exercise quality control.Hence my comparing the agent banks with "franchisees," though with the nontrivial difference that in this case the franchiser cannot possibly fail, and so has that much less reason to be efficient or to innovate aggressively. This is a very different market structure. My position is that it will different from the competitive case in the usual ways. George Selginhttps://www.blogger.com/profile/06850790566082586328noreply@blogger.com