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> But if the central bank targeted NGDP, the Inflation Fallacy would be true. With the central bank holding the path of nominal spending constant, every extra 1% of inflation really would mean that real spending falls by 1%. Ordinary people would understand macroeconomics better, without us having to teach them anything. Would that be a Good Thing?

That would be a good thing, *but* we'd have to give up the idea that "inflation is controlled by how the Central Bank sets the money supply."

If we target NGDP and there's inflation, then that's a Bad Thing. But the proper policy response won't necessarily be obvious. It could be to do nothing (if the inflation is due to an external supply shock, like the oil crisis); it could be to impose some sort of structural reform; it could be to directly invest in some promising but risky area. The temptation, however, may be to impose price and wage controls.

Much of this depends on how the government sees its side of the books. If the inflation is combined with high real interest rates, then the government will see deficit spending as relatively more expensive; if the inflation is combined with low real interest rates, then the government might find it optimal to engage in short-term deficit spending. Ideally, this would allow a keen observer to distinguish between inflationary demand and supply shocks.

*However*, this signal will be partially lost if the central bank targets NGDP with the interest rate policy instrument.

> There's a second macroeconomic fallacy. And it's even harder to explain why it's wrong. It doesn't have a name, so I will call it "the Interest Rate Fallacy": "If you want higher interest rates, then the central bank should just set a higher interest rate, duh!".

How about the "Jackknife Fallacy?" If you're reversing a trailer and you want it to turn one way, you must first turn the driving vehicle slightly in the opposite direction. Failure to do so just jackknifes the trailer.

> Would it be better to change the world to make the Interest Rate Fallacy true? It is possible to do this in principle, but would it work in practice? And would the world be a better place if we made it work in practice?

I think this is less important than the inflation fallacy. People believe this fallacy secondarily to the inflation fallacy, since in modern discourse this is usually in the context of "because high interest rates mean low inflation." The Bank of Sweden wasn't trying to raise inflation with its rate hike, after all, it was trying to prevent (future) inflation.

Moreover, I'm not sure whether the two fallacies can even be simultaneously reconciled. Your post about making the inflation fallacy true requires the CB to credibly link its interest rate on reserves to inflation expectations. However, if a Central Bank targets both NGDPL and the inflation rate, then it's implicitly trying to target RGDP -- a real-terms variable.

If we're sticking with only one target, then you and Sumner have already made the good case that the NGDPLT is superior to inflation-rate targeting.

Majromax: "That would be a good thing, *but* we'd have to give up the idea that "inflation is controlled by how the Central Bank sets the money supply.""

Hmmm. Yes. We would have to replace it with "NGDP is controlled with how the central bank sets the money supply, and inflation depends on NGDP and on supply shocks." Hmm. Actually, I think I like that better. It handles the supply side better.

"How about the "Jackknife Fallacy?" If you're reversing a trailer and you want it to turn one way, you must first turn the driving vehicle slightly in the opposite direction."

Good metaphor, but a lot of people don't know how to reverse a trailer either! [Actually, reversing a trailer is like a double inverted pendulum. Reversing a truck with no trailer is like an inverted pendulum, since you turn the front of the truck North to make the truck go South. When I was a young man I could sometimes reverse a 4 wheel trailer (front axle swivels) into a barn. That was very hard. Treble inverted pendulum.]

"The Bank of Sweden wasn't trying to raise inflation with its rate hike, after all, it was trying to prevent (future) inflation."

I thought it was trying to prevent financial instability, and was willing to accept the (illusory) trade-off of lower than target future inflation.

I don't want it to target both inflation and NGDP; that can't be done. But could we figure out a way it could use an instrument to target NGDP (or inflation) where if NGDP were below target, interest rates would rise? So that the inverted pendulum becomes a regular pendulum.

That would have an additional advantage at the ZLB. The only cost of hitting the ZLB would be that NGDP (or inflation) would be a bit **above** target.

> But could we figure out a way it could use an instrument to target NGDP (or inflation) where if NGDP were below target, interest rates would rise? So that the inverted pendulum becomes a regular pendulum.

This could possibly happen if the CB's policy tool was to pay interest on base money, such that the amount paid out in each period was proportional to the NGDP shortfall.

If "everyone" expected NGDP to be below target, then loaning someone else my dollar would result in foregoing interest proportional to that shortfall. Ergo, I'd demand interest from my counterparty in proportion to how far below target I expected NGDP to come in. The lower the NGDP, the greater the interest rate.

Now, the only trouble is that I'm not sure that this is an effective policy tool for actually meeting the NGDP target. With an expectation of sticky incomes, this suggests that agents who currently hold cash should seek to hoard it in order to increase spending in the next period, which would in turn push NGDP further below target.

With below-target NGDP, we always want (interest-bearing) cash to be a less-attractive holding than real goods or investment, and I don't see a way to do that that doesn't necessarily imply low interest rates.

[ Inflation Fallacy: Inflation makes us worse off because a 1% rise in prices means we can afford to buy 1% less stuff. ]

That isn't a fallacy. When prices rise 1% overall, cash and bond savings buy 1% less.

Wages lag inflation, requiring people to renegotiate. In the interim, their wages buy less. How does one view inflation as neutral and even magically beneficial?

As people come to expect inflation, they attempt to get ahead of it with salary demands, higher interest expected on loans, and uncertainty about future payments in long-term contracts. I don't see the benefit.

You don't state directly how engineered inflation is going to make us rich, and there is no mention of any possible negatives. It seems that people dislike inflation because they are utterly stupid, and not because inflation brings to mind Germany, Zimbabwe, and the US in the late 70's.

Please describe how to do inflation the right way, unlike in those examples.

In principle, you could arrange every aspect of the peasant's lives to make them better off. It only remains for philosopher-engineers to take care of the details. There must be a way to do anything which is possible in principle.

"but a lot of people don't know how to reverse a trailer either" Used to have to do that with the business, then I got a station wagon.

"When I was a young man I could sometimes reverse a 4 wheel trailer (front axle swivels) into a barn. That was very hard. Treble inverted pendulum." Yikes. But that is presumably where you learnt to speak with slow rural dignity :)

Is that the interest rate fallacy? That's not how I interpret what they're saying. Maybe I don't get it but, i think it means that the interest rate is a function of (government) deficit spending and that if you want rates on (government) liabilities to be higher, the supply of (government) liabilities relative to demand for (government) liabilities needs to be high enough to justify higher rates. Government as borrower of last resort. Pulling as opposed to pushing on a string.

I'm not smart enough to understand how your paying interest on old money isn't fiscal policy. How isn't it paid by government? The central bank doesn't run a deficit (or have a negative net worth) does it? It pays interest out of interest earned by lending? Is the central bank allowed to be a net payer of interest? If it isn't who is paying interest to money holders?
I hope that made sense and doesn't make me sound too foolish.

The inflation idea may be a fallacy in aggregate, but it is certainly possible to be true for an individual.

Jim: it may be true in aggregate as well, that inflation makes us worse off. Indeed it is true in aggregate, at least when inflation gets above some level. An invalid argument may have a true consequent. There are costs to inflation (and some benefits too). But the inflation fallacy is still a fallacy, because it is an invalid argument about the costs of inflation.

Majromax: yes, there are two effects: it increases the demand for money and also increases the growth rate of the supply of money. With perfectly flexible prices and rational expectations it is easy to see the net result-- increased inflation but no jump in the price level. But if there were a jump up in money demand, we would need a jump up in money supply to offset it.

Andrew: it is a fallacy. For every apple bought there is an apple sold. If the price of that apple rises by $1, the buyer is $1 poorer and the seller $1 richer. We can always afford to buy the goods we ourselves produce. That is the valid kernel of truth in the correct version of Say's Law.

But you are right about the money-wealth effect. And maybe right about the bond-wealth effect too, in an overlapping generations model.

Lorenzo. The old farm workers could do it. Last month a truck driver was lost on Carleton Campus. So I joined him in the cab to show him where to go. And he reversed that big artic perfectly through narrow bends. He didn't think it was anything special. There is a spatial sense that some people have, and can develop with practice. But others don't have a clue.

Miami: makes sense, and not foolish, but it is wrong. Compared to a baseline with no money printing, if the central bank prints money and gives it away (or pays it as interest) there is no effect on the government budget constraint. But compared to a baseline where the central bank prints money and gives it to the government, or uses it to buy bonds and pays the interest on those bonds to the government, there is an effect on the government budget constraint.

Paying interest to people with money is a redistribution to people with money

Really would make us hold cash eh?

Keynes mentioned stamped money which is the opposite

You can keep interest rates high and redistribute money to the rentiers and shrink the economy if you don't care about people in general

In fact Keynes thought this the usual... keeping interest rates too high

When I started Reading the post, I expected an explanation why inflation does not make every single individual worse off. Notice that this is different from an entire economy better (or worse) off, or government finaces better (or worse) off. But I could not find any. Maybe the author is tired of explaining. But considering that his considers his task "Eternal", please, do it one more time.

Shorter everyone: At the aggregate level, inflation might be benign, but it is re-distributive at the individual level and so there will be unhappy losers and happy gainers who will lobby for their interests. Behavioral economics will assert that, in an equal transfer, the losers will be made far more unhappy than the gainers were made happier. This is why the "fallacy" persists.

"Lots of people believe the Inflation Fallacy: "Inflation makes us worse off because a 1% rise in prices means we can afford to buy 1% less stuff, duh!". It is hard work to explain to people why this is wrong, and each new generation has to be taught it anew."

Isn't that a question of definition? For an economist, if prices rise but incomes do not, that is not inflation, right? But a price rise, whether wages rise or not, is inflation in common parlance.

However, mean income can rise with prices while median income does not. In that case, for most people a rise in inflation does mean that they can afford to buy less stuff.

"It might be a good thing politically, because it is hard politically for an inflation-targeting central bank to try to increase inflation, when inflation is below target."

Really? Do you think that politics is what has prevented CBs from increasing inflation? (Aside from the ideology of certain central bankers.) Kaletsky ( http://blogs.reuters.com/anatole-kaletsky/2014/10/31/the-takeaway-from-six-years-of-economic-troubles-keynes-was-right/ ) thinks that the evidence of the past few years indicates that differences in fiscal policy is the key to differences in outcomes since the financial crisis.

"Macroeconomic coordination failures might be less likely, if ordinary people's expectations were closer to rational expectations."

Theories based upon so-called 'rational expectations' might work better if they accorded with ordinary people's expectations.

1) If you work for a living, inflation is not a problem. Your salary is one of the rising costs. Most people did just fine in the 1970s, because they got regular cost of living increases. Even better, their home mortgage payments shrank radically. Inflation hurts those who do not work for a living since they rely on nominal values to purchase the goods and services they desire. Ending inflation to satisfy them required a massive recession that we have still not recovered from over 30 years later. (Sure, we "recovered" from each recession, but wages have been stagnant or falling, and each "recovery" takes longer than the previous one.)

2) It is possible to set higher interest rates by just setting higher interest rates. This happened in the late 1970s, and 20% mortgages were suddenly no longer a rarity. Why it can't be done today is an interesting research topic. My guess is it is because banking operations are so completely divorced from the actual economy that 99+% of the population relies on.

In your interest on old money model at what rate does government income and expenditure change so that it remains the same in real terms? Isn't it the same as the rate paid on old money? If central bank liabilities grow at rate m, government liabilities must also. In terms of real resources and because the accounting requires it, i think.

@djb:

> Paying interest to people with money is a redistribution to people with money

No, it's a relabeling. If we collectively decide tomorrow that bills labeled "one dollar" really mean "one hundred dollars," then we've paid interest on money.

@Jose:

> When I started Reading the post, I expected an explanation why inflation does not make every single individual worse off.

See the linked-in-post article on paying interest on base money

@Min:

> For an economist, if prices rise but incomes do not, that is not inflation, right? But a price rise, whether wages rise or not, is inflation in common parlance.

But the central bank doesn't tweak the money supply to cause "inflation but not inflation."

General inflation is a rise in the cost of everything, including wages. With flexible prices and wages, inflation is real-terms neutral. Changes in the distribution of prices involve a supply-side shock of some description.

> Really? Do you think that politics is what has prevented CBs from increasing inflation? (Aside from the ideology of certain central bankers.)

Ideology of central bankers is still politics, since central bankers are appointed by politicians to achieve politically-given mandates. The ECB is legally prohibited from announcing that it will target 5% inflation, for example.

> Kaletsky thinks that the evidence of the past few years indicates that differences in fiscal policy is the key to differences in outcomes since the financial crisis.

Sure, but look at the idea of monetary offset. The ECB has actively sought to tighten monetary policy, as did Sweden. The US weathered the sequester quite well, all things considered.

The trick is that when central banks are forced to use "uncomfortable" tools, fiscal policy can act as a sort of helicopter money, when CBs are willing to purchase the resulting government debt.

Fiscal policy -> deficit -> OMO is exactly equivalent to helicopter money.

@Kaleberg:

> 2) It is possible to set higher interest rates by just setting higher interest rates. This happened in the late 1970s, and 20% mortgages were suddenly no longer a rarity.

Of course that's possible. But the real question is whether it's possible to set higher interest rates consistently with stable, low inflation and full employment.

@Miami Vice:

> If central bank liabilities grow at rate m, government liabilities must also.

Right. In real terms, interest-on-money doesn't change anything if prices are flexible. If prices are sticky downwards, interest-on-money makes the economy seem as if prices are more flexible than they really are (since prices can go down slightly in real terms without going down in nominal terms).

Interest on money is an interesting idea because it allows the CB to act consistently with a targeted rate of inflation without distorting anything. Helicopter money is distorting, open market operations are distorting, just about everything else is really. Interest on money doesn't say anything about how we get to the target rate of inflation, but it does do the bulk of the "heavy lifting" in expanding the base money supply.

Jose: the Inflation Fallacy is a fallacy because it implicitly assumes that whatever caused the inflation had no effect on dollar incomes. And since aggregate dollar income from the sale of newly-produced goods is exactly the same thing as aggregate dollar expenditure on newly-produced goods, that is a very dodgy assumption. You need a theory to tell you whether whatever caused the inflation will also cause an equal increase in dollar incomes. And that depends on what causes the inflation, and on the economic theory. For example, it is easy to build a theory where a 1% increase in the money supply causes a 1% increase in all prices and a 1% increase in all dollar incomes, so the only thing that happens is that each dollar is worth less, but nothing real changes. A theory like that is definitely not the last word on the subject, but it does create a counterexample, to demonstrate that the Inflation Fallacy is a fallacy, because it assumes the conclusion.

Shorter, simpler, example: If I earn my income from selling apples to you, and you earn your income from selling bananas to me, then if we both double our prices we can both double our incomes and can *afford* to buy exactly what we were buying before. (Whether we will *choose* to continue buying exactly what we were buying before is a separate question. But if the money supply doubles, and all prices double, we might choose to do this.)

Min: "Isn't that a question of definition? For an economist, if prices rise but incomes do not, that is not inflation, right? But a price rise, whether wages rise or not, is inflation in common parlance."

That is a different fallacy: the identification of "wages" with "income". Capitalists are people too.

And if that's what Kaletski said, he is wrong. Compare the Eurozone with the US. US tightened fiscal more, but looser monetary policy offset it, and the US recovered faster. But that's off-topic. Yes, politics matters. See Germany.

Miami: "If central bank liabilities grow at rate m, government liabilities must also. In terms of real resources and because the accounting requires it, i think."

Compare it to a 2 for 1 stock split. Each stock is only worth half as much as before, and the firm's assets and liabilities are unchanged in real terms. It's just we are talking about a continuous 1+m for 1 stock split, and all other prices are measured in those stocks.

Kaleberg: "2) It is possible to set higher interest rates by just setting higher interest rates. This happened in the late 1970s, and 20% mortgages were suddenly no longer a rarity."

That happened in Canada in 1982(?). And the result was that interest rates *subsequently* fell, to a lower level than they had previously been. Canada in 1982 was exactly like Sweden recently, only moreso, and the Bank of Canada understood the Interest Rate Fallacy, and knew that by raising interest rates it would cause interest rates subsequently to fall.

Majromax doing sterling work.

My old post on the Inflation Fallacy

MOI: "Isn't that a question of definition? For an economist, if prices rise but incomes do not, that is not inflation, right? But a price rise, whether wages rise or not, is inflation in common parlance."

Nick Rowe: That is a different fallacy: the identification of "wages" with "income". Capitalists are people too.

Sorry if I gave the impression that that's what I think. Besides, I am not the one who came up with terms like "wage-price spiral". ;)

Pedagogically, I think that it is easier to tell students that what they think inflation is is not what it means as a technical term. Easier for the students, that is. It is not that they are thinking incorrectly, it is that they are not thinking systemically at all. What they have grown up hearing is inflation in terms of some price index or other, usually the CPI. Nobody has told them any different. Labeling their ignorance a fallacy needlessly engenders resistance.

I was able to understand your model when I thought about the central bank as a repository for money (a real thing not unlike gold). Account holders are paid interest in real (gold like) money on deposit at the central bank. whatever is on the asset can be ignored since it didn't change.

The curious thing to me as a non economist bystander is it seems like monetarists saying MV=C+G+I+(X-M) while the other side(FTPL?) is saying PQ=C+G+I+(X-M)
One side says increase M the other, increase Q; rinse, repeat.

One describing it in PQ the other in MV and both assuming the starting point (catalyst?) while the truth seems to be yes, both, continuously.

Each side has a preferred authority with a lever.
One side has nominal growth as a goal, the other real growth that's potentially unsustainable and/or of questionable quality.

Is that the gist, sort of. Each side incorporating more or less similar assumptions and getting the same answers one describing it the ways M and V change and the other side P and Q.
Each side starting from the opposite side of the equation.
Monetarists arguing they have money and a machine that show the future and there's 5% inflation in the future so people rush to buy things before they lose out to inflation causing the inflation they were hoping to get in front of.

FTPL people arguing for directly changing income flows through fiscal policy; actively managing the distribution and some provisioning of output.

Each side starting at the opposite side of MV=PQ, if that wasn't clear in my previous comment.

Was my accounting correct (at least), given current institutional arrangements?

Nick, Suppose you had a country (Japan) with 0% trend inflation and 0.5% long term rates, and another country (USA) with 2% trend inflation and 2.5% long term rates. How do the Japanese peg the inflation rate at 2%? They could fix their currency to the dollar, and then (according to PPP) inflation expectations in the long run should rise to 2%. And according to interest parity the long term interest rate in Japan should rise to 2.5%. Immediately. John Cochrane would approve.

Your stock splitting analogy doesn't describe your model. For a stock analogy to describe your model you would need to be talking about changes to the dividend, not stock splitting. That's because you're giving it to existing equity holders in proportion to their existing holdings. Nothing material changes other than the number of pieces you can divide your identical equity position.

@Scott Sumner
What assumptions are you making about the success of US monetary policy? Presumably, what you suggest for Japan would be an obstacle for US monetary policy.

Sorry, my mistake, stock splitting makes sense as an analogy. Prices in stock change but not in terms of the fraction of assets required to make the same purchases. duh (not sure why i was thinking in terms of purchasing power). Thanks.

I was confused since, it seems, the analogy breaks down if the central bank buys assets with stock it issues.

The stock analogy combined with the fact that the central bank is, usually, limited to buying government securities if it wants to issue more stock seems to validate the FTPL. For your analogy to make sense, given current institutional arrangements, it would seem like the central bank would need to promise to make crappy investments. If it can only invest in government securities they basically need to hope (like Bernanke did in his testimony) the fiscal authority spends enough to make it true. I'm sure you interpret things differently.

Min: OK. That might work. Or maybe we should start out by saying: it depends on what causes the inflation.

Scott: I think that would work, except for changes in equilibrium real exchange rates. But maybe a crawling peg could handle that, where the BoJ adjusts the rate at which it crawls. I think it's similar to my gold example, except you have the US dollar replace gold. (Which has historical echoes!). All variants on Irving Fisher's compensated dollar plan.

Miami: we normally assume that stocks trade in competitive markets. Two stocks with the same risk must trade at the same rate of return, and there are lots of stocks. Each individual stock faces a perfectly elastic demand curve at that market-determined rate of return. Zimbabwe shows that assumption does not work for money. The issuer of alpha money has de facto or de jure monopoly power, because that money is not a perfect substitute for anything else, and faces a downward-sloping demand curve. People demanded a smaller, but still positive stock of Zim dollars even when the rate of return on Zim dollars fell to a very negative number. The rate of return needed to fall a ridiculous amount before the Zim dollar lost all demand.

@Scott Sumner:

> They could fix their currency to the dollar, and then (according to PPP) inflation expectations in the long run should rise to 2%. And according to interest parity the long term interest rate in Japan should rise to 2.5%. Immediately.

But that's simply the Fisher effect. If the BOJ credibly promised 10% inflation, then the long term interest rates should quickly rise to 10+ε%.

None of this also says much about what short-term rates will do under such promises, and that's the crux of the "interest rate fallacy" question.

Nick Rowe: "Or maybe we should start out by saying: it depends on what causes the inflation."

When I was a kid I heard about the Weimar hyperinflation. The tale was that people were paid their wages twice a day, which they put into wheelbarrows and rushed to the stores to buy stuff before the prices went up again. Obviously incomes had to go up with prices or they would quickly not be able to buy anything. That story primed me not to think that inflation was only about prices, even though, later on, I heard people complain about inflation when prices rose but their incomes did not. Yet. OC, my parents heard about the Weimar hyperinflation when they were kids. :) I doubt if many kids hear that story anymore. Maybe they hear about Zimbabwe.

Anyway, as to where to start, as one of my philosophy profs tautologically said, we start from where we are. (I have told the story about that class. :)) I reread your original post about the inflation fallacy. You ask the students why inflation is bad. But where are the students starting from? What do they think inflation is? Do they think that it is bad?

Zimbabwe, seriously?
never mind the civil war, the land reforms, drought, collapsed output, sanctions, capital controls, required use of foreign exchange to buy food and raw materials (output had collapsed), massive corruption. (asset side)

Zimbabwe was the result of unsustainable unfunded government spending due to the things listed above. How in your mind did the money printed Zimbabwe make it into the economy or was simply printing it enough?

Stock splits don't change the rate of return. How does owning 1/1000 or 2/2000 of Apple inc change the rate of return?
Prices of in terms of apple stock would double, sure. The real rate of return is zero in your model, always. It isn't negative BECAUSE its paid on old money.

A stock split is nothing more than a change on paper to facilitate certain advantages. Each current stockholder’s holdings of stock double so that the proportion of the firm owed by the investor is the same both before and after the stock split. No loss of value is borne by the current stockholders.

I'm not sure from where you conjure up the negative return due to stock splitting. can you please explain?

Miami: Zimbabwe didn't stock split. They printed new stock, and gave/lent it to Mugabe.

That was my point. I was talking past you, thinking you were saying something different than you were. My original point which I lost while ranting is, that Cochrane is saying the same thing as you. If the rate of interest paid on old money rises from zero to 5% and government spending on real resources falls by 5% (remains the same nominaly) you have what Cochrane is saying. Government saving makes raising rates a successful tool to combat inflation. Mugabe didn't respond to rising rates the way a rational agent (borrower not to mention his lender) would if they were trying to avoid insolvency. Therefore, hyperinflation. The reason why Cochrane's model makes sense is that its the same as yours except he's explicitly modelling the behavior of the largest money user/issuer in the economy. That's how i interpret it.

Other than attributing the cause to the quantity of money or the cause to spending decisions your models are the same. Same moving parts same outcome different order.

Miami: no. You have missed what I said about the demand curve sloping down.

If you don't mind, can you be more explicit as to how I've missed that the demand curve slopes down?

of course no one will pay 2 apple shares for 1 apple share or $6 for $5. Uncompensated risks (I listed some above, which includes Mugabe paying himself and for stuff without the income to support it) drove the Zimbabwe $ value down.

Zimbabwe money continued to have liquidity value even as its price was falling. Probably less so, as use of foreign currency became more widespread.

So risk is held constant in your model? it doesn't vary because of the real things I listed above?

Miami: to keep it simple, ignore government bonds. All government deficits are money financed.

FTPL says M/P = PV(fiscal surpluses). This treats money just like a stock.

But there is a rate of interest r(t) in that PV calculation. Suppose that r(t) is not exogenous wrt M(t)/P(t), but is a positive function of M(t)/P(t). Because Md/P is a negative function of the opportunity cost of holding money, which is the difference between the rate of return on other assets minus the rate of return r(t) on money.

Nick, I agree.

Why isn't L(R-p) the same thing as the present value of the fiscal surplus?

sorry disregard

Plus, the real rate of return on holding money can be, and usually is, negative. (Currency pays 0% nominal interst and inflation is often positive). So the PV of fiscal surpluses doesn't even add up.

M/P = P.L(R-p)/P

M/P = PV(fiscal surplus)

i'm sorry i keep bugging you but, those aren't the same?

typo should be (fiscal surpluses)

off topic but i'm curious
Do you view expectations management by the central bank like this?

Expansion: for a limited time only we're lending money at real discount prices, sale ends when we hit our target

contraction: bring us your money, we've raised the real price we pay you to lend us money, for a limited time only

because that's expectations as i understand it; how it works and its inherent limitations or am i crazy?

Miami: not crazy. Sounds roughly right to me. That's roughly what the Bank of Canada does in normal times.

So when you were wondering if Cochrane's model was a monetarist model,I was saying, I think, they're the same model (yours expressed in terms of money demand). So I wasn't going mental? Phew.

Miami: John Cochrane's model was an FTPL model, not a monetarist model. But I showed you could get exactly the same results as he did, using a monetarist model, if you added his assumption that all new money was paid as interest on old money.

Nick,

"1. Lots of people believe the Inflation Fallacy: "Inflation makes us worse off because a 1% rise in prices means we can afford to buy 1% less stuff, duh!". It is hard work to explain to people why this is wrong, and each new generation has to be taught it anew. Ours the Task Eternal."

Do you happen to have a link to a good clear explanation of why this is wrong?

Philippe: Here is my old post on the inflation fallacy. Maybe someone else has a clearer version, somewhere on the web, but it was the best I could do.

In NGDP terms, output equals income, whatever the level of inflation.

So the perception of inflation as a problem or a solution depends on the distribution of inflation across each side of that equivalence and one's perspective in looking at that distribution.

It's prime territory for the fallacy of composition.

My god, what a mess macroeconomics is if impoverishing pensioners, welfare recipients and people whose income is only revised upwards with time lags (most employees and workers) is considered as of no importance. The reason given is that the higher nominal income of the sellers equates out the lower real income of the buyers so the total income in the economy is not reduced.

What does that have to do with real life?

Speaking of fallacies, that is the fallacy of division which thinks that something true for the whole must also be true of all or some of its parts or: Not seeing the trees for the wood.

Macroeconomists seem to fall for it.

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