Unexpected inflation comes basically all from discount rates: a higher real interest rate devalues government debt via inflation.
While a top pick for professionals, it is not the best blog for beginners as the math and economic theory are too deep. I would much rather have Powell's healthily acknowledged uncertainty than a PhD economist who thinks he or she "knows" how the Phillips curve really works. He received the Global Award for Entrepreneurship Studies in as well as an honorary doctorate from the Universidad Francisco Marroquin. It is an empirical correlation that gained causal status by its repetition. You may think that puts you at the center of things.
Present values change by more than inflation, and long term bonds soak up a lot of fiscal shocks, smoothing inflation forward. I also decompose recession related shocks, monetary and fiscal policy shocks, and the value of debt.
The new June version includes a condensed presentation of the fiscal theory of monetary policy. The latest July update includes data updated to The Value of Government Debt July Growth variation does not show up. Parker and Michael Woodford Eds. The fact that inflation is quiet and stable at zero rates cleanly invalidates the standard old-Keynesian model, which predicts a deflation spiral, and almost as cleanly invalidates new-Keynesian sunspots. New Keynesian price stickiness plus fiscal theory selection works well, and solves the puzzles of new-Keynesian models with selection by post-bound active policy.
Stable inflation suggests a higher rate will raise inflation.
That conclusion is hard to escape, even temporarily. The fiscal theory with long term debt does it. Even that does not rescue traditional views of monetary policy. A shortish nontechnical summary. Data and Programs. Last manuscript. Published version pdf at the University of Chicago Press website. Full text html of the published version. Edited with Toby Moskowitz. The introductions explain why the papers are so important and how we think about the issues today. My essays are here, other essays may be on other authors' webpages.
For everything else you'll have to buy the book or e book. European Economic Review , The fiscal theory of the price level can describe monetary policy: interest rate targets, quantitative easing, and forward guidance. With long term debt, a higher interest rate can produce temporarily lower inflation.
The paper starts with a completely frictionless environment, and then replicates Chris Sims's "stepping on a rake" paper, which has the latter result along with elaborations that smooth out the impulse-response functions. I boil Sims down to the central ingredient,long term debt. The replication is useful if you want to know how Sims derived his model or solved it; also useful as a guide to solving continuous-time sticky-price models with jumps.
Journal of Monetary Economics 92, First link includes the online appendix. In standard solutions, new-Keynesian models produce a deep recession with deflation at the zero bound. Useless government spending, technical regress, and capital destruction have large positive multipliers. The recession, deflation and policy paradoxes are larger when prices are less sticky, and news has larger effects for events further in the future.
These features are all artifacts of equilibrium selection. For the same interest-rate policy, equilibria that limit a downward jump of inflation on news of the trap, for the same interest rate policy, reverse all these predictions. They predict mild inflation, little output variation, and negative multipliers during the liquidity trap.
Their predictions approach the frictionless model smoothly, and promises in the far-off future have less effect today. A big deflation means people expect the government to raise taxes or cut spending a lot to pay off a windfall to bondholders. Thus, fiscal considerations suggest the equilibria with limited jumps and effects. Macro-Finance Review of Finance 21 3 : Links: Publisher doi , Last manuscript.
This is a review paper. I survey many current frameworks including habits, long run risks, idiosyncratic risks, heterogenous preferences, rare disasters, probability mistakes, and debt or institutional finance. I stress how all these approaches produce quite similar results and mechanisms: the market's ability to bear risk varies over time, with business cycles.
I speculate with some simple models that time-varying risk premiums can produce a theory of risk-averse recessions, produced by varying risk aversion and precautionary saving, rather than Keynesian flow constraints or new-Keynesian intertemporal substitution. The July manuscript contains a long section with thoughts on how to make a macro model based on time varying risk premiums, that got cut from the above final version. This is the "manuscript" referenced in the paper. The Data and programs zip, matlab.
The slides for the talk. Typo: equation 17 is wrong. The same equation, 3 is right. The Fragile Benefits of Endowment Destruction. November Journal of Political Economy 5 With John Y. The benefits of endowment destruction depend sensitively on how you discretize the model. Lesson: It's better to use the the continuous time version and make sure discretizations make sense. There is a nice lesson on how to extend diffusion models to jumps too. Computer program. A response to Sims January In fact, there is essentially no fundamental disagreement between the two papers.
A New Structure for U. Government's Debt , pp. I propose a restructuring of U. Federal debt. All debt should be perpetual, paying coupons forever with no principal payment. The debt should be composed of 1 Fixed-value, floating-rate, electronically transferable debt. Such debt looks like a money-market fund, or reserves at the Fed, to an investor. The Treasury should adjust maturity structure, interest rate and inflation exposure of the Federal budget by transacting in simple swaps among these securities. Op-eds, blog posts, essays, articles, and other digestible writing Note: I started a blog in January , and don't echo the blog posts here.
The trade war to end all trade wars will end in economic carnage.
July 31 Local Copy. Tax and spend is better than cross subsidies. This is the key to deregulation. It's the end of the beginning for the economy, not the other way around. May 23 Blog version. A debt crisis is on the horizon. Washington Post, March 27 Debt and deficits are a danger. Rising interest rates could spark big trouble quickly. Reforming entitlements is the answer, and sooner better than later. Local copy pdf.
Trump's tariffs will hurt trade, and trade is a good thing -- really Fox News March 5 Local copy Law and the Regulatory State In Thomas W. Gilligan, Ed. Exceptionalism interpreted as the rule of law guaranteeing economic freedom. In peril, as always. Eight Heresies of Monetary Policy.
With David R. Here's what healthcare looks like in a perfect world. Feb 10 The Hill. Economic growth is the big problem; bi-partisan policies to fix it rather than keep yelling the same talking points louder. On debt, the small probability of a debt crisis is the big problem, and how to avoid it. Oral remarks much shorter, sweeter I get 5 minutes but less documented. The Clinton Plan's Growth Deficit.
Wall Street Journal, August 12 Comments on the Hillary Clinton economic plan. See also the related blog post. Trade and Immigration July An uncompromising defense of free trade and immigration. For George P. Shultz, ed.
Equity-financed banking. How it works, and substitutes for the Dodd-Frank illusion that regulators can keep us safe. This is the paper behind the talk, next item.
In George P. Equity-financed banking and a run-free financial system Talk given at the Minneapolis Federal Reserve's "Ending too big to fail" symposium, May 16 I try to quantify how much growth we could get out of better policy by regressing GDP per capita on the World bank's ease of doing business measure. The answer: a lot. Local pdf. Programs and data for the graph. Taylor, and Christopher Miller Eds.
Separate the tax code, the subsidy code, the transfer code, and the overall level of taxation. Local copy Economic Growth. October An overview of what a growth-oriented policy program might look like. Regulation, finance, health, energy and environment, taxes, debt social security and medicare, social programs, labor law, immigration, education, and more. Written for the Focusing the presidential debates initiative.
Williams is a man of principle and good sense, a defender of freedom, and I am happy to be on his side. As should you. This collections of hard-hitting essays reflects a passionate commitment to freedom. With academic credentials contributing depth to his conclusions, he commands respect. Now, in economics, politics, and social philosophy, we have a ready reference in his own words. Visit Seller's Storefront. Items can be returned within 30 days of the estimated delivery date. All returns must be approved before an item is shipped back.
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