« Marrying satisfaction with happiness | Main | A simple model where NGDP targeting beats inflation targeting »

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

"Fluctuations in inflation are a noisy signal of monetary disequilibrium,"

Do you have an operational definition of monetary equilibrium?

OT, Michael Pettis offers that whether an economy is conventional or unconventional (neofisherite) with respect to interest rates is whether consumers are largely debtors or creditors.

Great post, Nick!

One semester I told my undergrad students about the Calvo fairy & how she's a central figure in state-of-the-art macro models (ok, not the fairy bit, but the random-ability-to-change-prices bit; no math). The stares than ensued weren't exactly blank, but more like "on what planet is that a sensible model?"

PS

Min: "Do you have an operational definition of monetary equilibrium?"

If I did have an operational definition of monetary disequilibrium (that could be observed in close to real time), I would just tell the central bank to target that operational definition to equal 0 at all times. Which would make monetary policy much simpler.

Lord: I will take a look. But it sounds wrong.

PS: Thanks!

Moi: "Do you have an operational definition of monetary equilibrium?"

Nick Rowe: "If I did have an operational definition of monetary disequilibrium (that could be observed in close to real time), I would just tell the central bank to target that operational definition to equal 0 at all times."

Oh, I did not expect to have an operational definition that would be cheap and easy to observe. But it would be nice to know what we are talking about. :) If there are only "noisy signals" then there is a lot of room to fudge.

Min: a non-operational (and crude) definition: monetary disequilibrium is when output deviates from what it would be if all prices were perfectly flexible.

I'm oversimplifying as there are many considerations, but it is intriguing from what might improve demand under different circumstances, though the whole consumer/producer, creditor/debtor division can be ambiguous under different income distributions.

The Calvo assumption might be reasonable if the cost of changing prices was noisy, such that most firms would seek to wait for a low-cost period. Nevertheless, George Selgin (in Less than Zero) suggests that firms are most likely to change prices is response to shifts in their particular sectors, and since these are typically supply shifts that would affect output at the same time, targeting overall nominal output is more appropriate than targeting inflation. Because, in the latter case, firms are being forced to compensate for changes in unrelated sectors. If there is a good year for apples, apple prices have to drop less (or not at all, if we also consider your example), but banana prices must rise, and that's more difficult. (Or vice versa.)

Ultimately, we don't seem to know much about the microeconomic causes of non-neutrality. So it's hard to come up with good models.

anon: your description of what George Selgin says is roughly what I have in mind. Unfortunately, we need to model it in general equilibrium terms. A good apple harvest only tells us that the relative price of bananas to apples needs to rise. It is silent on whether apple prices should fall or banana prices should rise, in terms of money.

But imagine there were 10 different fruits, and a shock hits one sector relative to the other nine. In a coordination game, it is easier to imagine the one sector changing its price than the other nine sectors changing their prices. But this means that the sectoral skewness of the real shocks is what matters. And coordination games have multiple equilibria. So it gets tricky. Which is why Calvo's fairy is such a temptress.

"Ultimately, we don't seem to know much about the microeconomic causes of non-neutrality. So it's hard to come up with good models."

Agreed. We are always faking it, with these microfoundations. I blame Tony Yates, for saying that NGDP targeting is "faith-based", unless we have a model. I've been trying to build a model to please Tony. But my failed attempt has only taught me that I need to drop the assumption that the firms that do change prices are a representative sample of all firms. Which is something, I guess.

Nick Rowe: "Min: a non-operational (and crude) definition: monetary disequilibrium is when output deviates from what it would be if all prices were perfectly flexible."

IOW, the normal state of affairs. ;)

Joking aside, thanks, Nick. :)

The comments to this entry are closed.

Search this site

  • Google

    WWW
    worthwhile.typepad.com
Blog powered by Typepad