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Businesses are also reluctant to borrow, because they recall how previous increases in inflation — and thus in interest rates — pushed otherwise healthy companies into bankruptcy. The life insurance industry has been destroyed by high and uncertain inflation as well. Economists might respond by suggesting that mortgages, insurance contracts, and other agreements could be indexed to the price level, adjusting payments to the contemporary rate of inflation.

Argentina and inflation: what the rest of the world can learn

But when the inflation rate is changing rapidly, it is hard to know what the contemporary rate even is. The previous government tried to deceive the public by publishing inflation estimates that experts agreed were far lower than the true rate of price growth. As one Argentine friend explained, the government fired the statisticians who had tried to provide accurate measures of inflation and replaced them with political allies who would produce artificially low numbers. In the years when the government allowed Argentinians to convert their pesos into dollars and take them out of the country, people who had financial wealth moved their money into investments in the United States.

I am told that there is much more Argentinian investment wealth in the US than in Argentina. As a result of this outflow of funds, investment in Argentina is low, holding down productivity and growth. Tight money and high interest rates depress demand and have caused real GDP to decline. So the government must pay a short-term political price to achieve a long-term economic gain.

First, price stability is fragile, and the inflation rate can rise rapidly. Labels: Economists , Inflation , Monetary Policy. Monday, August 12, Whither the Fed?

Why is the Fed lowering rates? It would be nice if the Fed acted more stably and predictably, leaving less room for the interpretation that they're just changing their minds, or panicking, or giving in to Trump tweets. What is the "data" in a "data-dependent" policy? They decided with a couple of dissents to reduce the target range for the fed funds rate by 0. So, something important must have changed since last September. What was it?

Economics A-Z terms beginning with I

Weak global growth. Trade policy uncertainty. Muted inflation. The neutral rate of interest is down. The natural rate of unemployment is down. Go see Steve's graphs. There really is not much case that the US economy is slowing down.

Typically central banks lower interest rates in the face of observed decreases in aggregate economic activity - somewhere. But we haven't seen any such thing. Must be some very weird policy rule at work here. That's a bit overstated. Central banks do react too forecasts. But most central banks, including ours, react cautiously knowing just how unreliable forecasts are. I can certainly understand that there's "trade policy uncertainty. But that's been with us since January And for North America, which we could argue is more relevant for the US, the trade uncertainty is actually lower than it was in September.

Brexit anxiety is with us of course, but again that's nothing new. So, I think you have to be more specific if you want to make a general case about policy uncertainty. And what's the hurry? You can't wait for resolution? The uncertainty work is interesting a great recent example. But if uncertainty really is an economic problem, it should be reflected in today's investment, investment plans a great measure hiring, durables purchases stock prices, and other forward-looking measures.

Moreover, it's not clear that the Fed should offset uncertainty as trade.

They are "supply" shocks. Previous post The one thing that has changed a bit is inflation. The Fed's chosen measure - headline PCE - is at 1. Not low, certainly, and well within what you might think is reasonable tolerance, but definitely below target. But, putting Steve's point in stronger voice, , 0. What would the corrective action be? The traditional answer, of course, is, lower interest rates. And lower real interest rates, as everyone knows, makes "aggregate demand" go up.

Low Price Inflation Means the Fed Will Retreat to Low Rates and Easy Money

Further, as everyone knows, output is demand-determined, so output therefore goes up. Then, by Phillips curve logic, inflation goes up.


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But, as everyone knows, I think, there are issues with the Phillips curve. AOC knows it, and Jay Powell knows it, as we can see in this exchange. Don't underestimate AOC. She rather brilliantly and knowledgeably led Powell down the road to admit the Phillips curve has died, so unemployment doesn't cause inflation any more. Then she smoothly went right to the false implication that any policy previously criticized as being inflationary will not cause inflation.

Powell didn't take the bait, but it's wiggling on the hook. What about the Phillips curve? Inflation seems to have nothing to do with unemployment or is it vice versa?? Japan and Europe, as well as our own 10 years of slow growth, seem testament to the falsity of the proposition that lower interest rates spark inflation. Powell seems to be telling AOC what his staff told him, which is that the Phillips curve is currently very flat.

The Phillips curve is still there though, or so Powell seems to think, though he seems a little confused about how the whole thing works. The reporters are trying hard to understand what the Fed is up to, Powell is struggling to explain it, and everything is coming out muddled. You know, I really think it does, and I think the evidence of my eyes tells me that our policy So, it will lower borrowing costs. You see confidence, which had troughed in June You see economic activity on a healthy basis. It just, it seems to work through confidence channels as well as the mechanical channels that you are talking about.

Steve comments scathingly: Well, there's no confidence channel running from Powell to me, that's for sure Powell started off well when he was appointed. But this decision makes clear what his limitations are. Powell is an attorney whose experience with monetary policy comes from sitting on the FOMC since You may think that puts you at the center of things. Sorry, it doesn't. There's a lot Powell doesn't know, and it shows.

True, a "confidence channel'' is something of a new idea, though quite common in central banking circles. We just need to give more and better speeches. All we have to fear is fear itself. But if one accepts an "uncertainty channel" certainly "confidence" can be interpreted as "belief in the Fed put," or other beliefs about future Fed policy. I think Steve's personal attack on Powell is unwarranted. Many most trained PhD economists are no better at steering the ship.

Does Japan Vindicate Modern Monetary Theory? by Koichi Hamada - Project Syndicate

You don't necessarily want a PhD hydrodynamicist at the wheel in a storm. Most of all "There is a lot Powell doesn't know, and it shows" seems to me totally unwarranted. Just what is there to "know" about the Phillips curve? 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. As a reminder, the Phillips curve is not standard economics. It is an empirical correlation that gained causal status by its repetition.