In retrospect, I needed a different first paragraph to start off Slouching Towards Utopia <bit.ly/3pP3Krk>. Too many people have been disappointed that the book is actually not much about industrial..
4. Careful management of resources, so as to make them go as far as possible.
a. with reference to money and material wealth : Frugality, thrift, saving. Sometimes euphemistically for Parsimony, niggardliness.
1670 Cotton Espernon 1. 11. 62 Men have ... been very liberal in their censure of the Duke's Oeconomy. a 1674 CLARENDON Hist. Reb. x. (1704) III. 88 Nor was this Oeconomy well liked even in France. [...]
etc etc etc.
Admittedly, my edition is rather dated now. But surely they have not retracted so many references.
Sandbu: We are supposed to HAVE a Leijunhufvud based theory of the natural of inflation (the rate that maximizes real income subject to expected shocks requiring changes in relative prices when some prices cannot adjust downward). The Fed supposedly estimated it at 2% PCE, but recognized that extraordinarily large shocks -- COVID/Putin -- require a FAIT. Now it just needs to figure out ho to set policy instrument values at levels to achieve its target.
It's the rate that allows some other important rate to remain stable. But which one? If it's wage inflation, then it's just the Phillips Curve backwards. We have that theory, fwiw.
If we are going to stay within the "natural" framework jargon as it has developed, then no, we are not maximizing, we're stabilizing. You could speak of a rate of real gdp/pc growth and have a target for that. But that's doesn't give you a theory. (And implicitly you would need a "natural" rate of gdp/pc growth that didn't throw something else out of whack and that takes us back into Roy Harrod's terminology, if not his thinking. I doubt there is such a thing.)
Do you have the Leijunhufvud reference that Sandbu wrote of ? That would be very interesting.
No I did not mean that Sandbu (of whom I really know noting) had referenced Leijunhufvud, just that the implied multiple disequilibrium of prices reminded me of Leijunhufvud.
Stabilized vs maximized: Might there not be more than one target that could lead to equilibrium. i.e., multiple equilibria? Granted this is not a theory that spells out how to find and set the trajectory of monetary policy instruments to maximize some objective.
There can be an infinite number of target rates, but a "theory" would be required to explain the (context-adjusted) affect on real GDP/pc growth of each of them. OR you can punt and say, à la Friedman, that any inflation target is compatible with any GDP growth rate as long as some third thing (Friedman said money supply, but that won't work here) was managed correctly. It's seems to me that the first of these is unachievable and the second would simply be incorrect.
It's not clear that Brad meant either one of these when he said we need "a theory of inflation". I was trying to flush him out. But you flushed me out instead! :-)
At least with me it is a case of thinking out loud but in a tone of already knowing it all.
Let me restart my view. The objective of monetary policy is to allow/facilitate changes in relative prices that maximize real income. Things, "shocks" constantly happen so relative prices have to be constantly changing. However, some prices cannot a just downwards as easily as others of not at all over relevant time scales, so this means that the average price level needs to rise constantly by enough to allow the relative prices to change but no more; there are also pries which cannot adjust upward as easily as others. This means that for any given structure of relative price upward and downward flexibility and average size/frequency of shocks there is a optimum rate of (presumably upward) movement of the average price level. A perfectly wise central bank would estimate this rate and set it as its inflation target. It would also be alert for extraordinary shocks that would require temporary deviation from the target. We might call this "Flexible Average Inflation Targeting" Even withing this best of all possible monetary worlds there will be out of income maximizing transactions and even some markets that do not clear at all (here is where Leijunhufvud comes in) = unemployment of resources including of labor.
All this seem to me to be the implicit meta model behind most monetary analysis.
My copy of the OED sites for economy:
4. Careful management of resources, so as to make them go as far as possible.
a. with reference to money and material wealth : Frugality, thrift, saving. Sometimes euphemistically for Parsimony, niggardliness.
1670 Cotton Espernon 1. 11. 62 Men have ... been very liberal in their censure of the Duke's Oeconomy. a 1674 CLARENDON Hist. Reb. x. (1704) III. 88 Nor was this Oeconomy well liked even in France. [...]
etc etc etc.
Admittedly, my edition is rather dated now. But surely they have not retracted so many references.
* cites
Sandbu: We are supposed to HAVE a Leijunhufvud based theory of the natural of inflation (the rate that maximizes real income subject to expected shocks requiring changes in relative prices when some prices cannot adjust downward). The Fed supposedly estimated it at 2% PCE, but recognized that extraordinarily large shocks -- COVID/Putin -- require a FAIT. Now it just needs to figure out ho to set policy instrument values at levels to achieve its target.
But it didn’t have a theory. Alan Greenspan announced that 2%/year had been written on a stone tablet.
Do we t know for sure it it needs editing? Would the case for a pause be an stronger if the target were 3%?
Yes...
I'll adjust my priors. :)
But I still feel that a 2% FAIT has hardly been tried.
When and how does the Fed explain the change?
Yglesias: One thing, Maximize net present value using social values.
"Natural rate of inflation"? P*?
It's the rate that allows some other important rate to remain stable. But which one? If it's wage inflation, then it's just the Phillips Curve backwards. We have that theory, fwiw.
Stable at what rate? Should it not be the rate that maximizes real pc income?
If we are going to stay within the "natural" framework jargon as it has developed, then no, we are not maximizing, we're stabilizing. You could speak of a rate of real gdp/pc growth and have a target for that. But that's doesn't give you a theory. (And implicitly you would need a "natural" rate of gdp/pc growth that didn't throw something else out of whack and that takes us back into Roy Harrod's terminology, if not his thinking. I doubt there is such a thing.)
Do you have the Leijunhufvud reference that Sandbu wrote of ? That would be very interesting.
No I did not mean that Sandbu (of whom I really know noting) had referenced Leijunhufvud, just that the implied multiple disequilibrium of prices reminded me of Leijunhufvud.
Stabilized vs maximized: Might there not be more than one target that could lead to equilibrium. i.e., multiple equilibria? Granted this is not a theory that spells out how to find and set the trajectory of monetary policy instruments to maximize some objective.
Thanks for the clarification.
There can be an infinite number of target rates, but a "theory" would be required to explain the (context-adjusted) affect on real GDP/pc growth of each of them. OR you can punt and say, à la Friedman, that any inflation target is compatible with any GDP growth rate as long as some third thing (Friedman said money supply, but that won't work here) was managed correctly. It's seems to me that the first of these is unachievable and the second would simply be incorrect.
It's not clear that Brad meant either one of these when he said we need "a theory of inflation". I was trying to flush him out. But you flushed me out instead! :-)
At least with me it is a case of thinking out loud but in a tone of already knowing it all.
Let me restart my view. The objective of monetary policy is to allow/facilitate changes in relative prices that maximize real income. Things, "shocks" constantly happen so relative prices have to be constantly changing. However, some prices cannot a just downwards as easily as others of not at all over relevant time scales, so this means that the average price level needs to rise constantly by enough to allow the relative prices to change but no more; there are also pries which cannot adjust upward as easily as others. This means that for any given structure of relative price upward and downward flexibility and average size/frequency of shocks there is a optimum rate of (presumably upward) movement of the average price level. A perfectly wise central bank would estimate this rate and set it as its inflation target. It would also be alert for extraordinary shocks that would require temporary deviation from the target. We might call this "Flexible Average Inflation Targeting" Even withing this best of all possible monetary worlds there will be out of income maximizing transactions and even some markets that do not clear at all (here is where Leijunhufvud comes in) = unemployment of resources including of labor.
All this seem to me to be the implicit meta model behind most monetary analysis.
Yep. That’s what should be the implicit meta-model. But it seems to me that it rarely is...