tag:blogger.com,1999:blog-4409551172339639840.post4384721725150672623..comments2023-10-11T09:06:30.060-07:00Comments on Douglas L. Campbell: Raise Rates to Raise InflationDoug Campbell http://www.blogger.com/profile/11028049845008665877noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-4409551172339639840.post-31532257194883317502017-04-13T03:44:16.114-07:002017-04-13T03:44:16.114-07:00Doug,
I think you may be underestimating the neo-...Doug,<br /><br />I think you may be underestimating the neo-Fisherian proposition a little. According to Cochrane, Woodford himself acknowledged that a basic NK-model has neo-Fisherian implications:<br /><br />http://johnhcochrane.blogspot.de/2015/07/schmidt-and-woodford-on-neo-fisherian.html<br /><br />Also Gabaix seriously considered it in a recent paper:<br /><br />http://www.nber.org/papers/w22954<br /><br />" a permanent rise in the interest rate decreases inflation in the short run but increases it in the long run."AChttps://www.blogger.com/profile/16030735576502674706noreply@blogger.comtag:blogger.com,1999:blog-4409551172339639840.post-35901234523899441112017-04-01T19:31:32.673-07:002017-04-01T19:31:32.673-07:00"I've often wondered if raising interest ..."I've often wondered if raising interest rates would bolster the economy." <br /><br />Really, the answer is no. <br /><br />"I know a lot of retirees who have cut back their spending because of low interest rates."<br /><br />I'm skeptical that retirees' spending is relatively more elastic with respect to the state of the economy than other groups. I suspect that 40 year olds looking to buy/build houses have relatively more depressed spending. It's been known for a long time that central bank policy largely in large part through the housing market. <br /><br />However, there are three other reasons to think this is wrong. Bond prices and interest rates are inversely correlated. Imagine the poor grandmother, too conservative to invest in stocks, which are at an all-time high, living off interest payments from her bond fund (and Social Security). Well, any bond she bought before 2008 has appreciated in value thanks to low rates (price and interest rate are inversely correlated). Second, to the extent she held it to maturity, she locked in the earlier higher rate. What's more, if you raise rates now, the price of that 30 year bond this poor grandma owns is going to go in the toilet. Pretty soon, Grandma is going to have to skip bingo night. <br /><br />Third, typically, people switch about 8% of their portfolio out of stocks after retirement. Thus, retirees also invest in stocks and real estate. Loose money is good for these other asset groups as well. Low interest rates on risk-free government assets do encourage people to make real investments. Doug Campbell https://www.blogger.com/profile/11028049845008665877noreply@blogger.comtag:blogger.com,1999:blog-4409551172339639840.post-70677879828179787052017-04-01T13:02:27.290-07:002017-04-01T13:02:27.290-07:00I've often wondered if raising interest rates ...I've often wondered if raising interest rates would bolster the economy. I know a lot of retirees who have cut back their spending because of low interest rates. Most of them have other investments, but they are higher risk and longer term. When you hit your 60s or 70s, you have to rethink your financial horizon. Most borrowed money these days goes towards financial engineering and consolidating trusts that reduce competition. These actually fight innovation and raising productivity.<br /><br />Too many economists don't understand the economy at an accounting level, so they draw broad brush rules that describe emergent behavior. Physicists, chemists and biologists are used to finding apparently contradictory behavior, since they recognize that they are dealing with complex systems built from smaller components. Economists seem to be stuck in the 18th century and are philosophically vitalists.Kaleberghttps://www.blogger.com/profile/05283840743310507878noreply@blogger.comtag:blogger.com,1999:blog-4409551172339639840.post-72016020058980761002017-03-31T07:01:12.741-07:002017-03-31T07:01:12.741-07:00Thanks for posting Stephen. You're certainly a...Thanks for posting Stephen. You're certainly a unique thinker, so I'm happy to have you posting here. Diversity of opinions is a great thing, and you certainly contribute to this in Macro.<br /><br />In any case, you wrote "Higher rates can indeed lower real economic activity in the short run." We are in agreement on the short-run impact. If so, then why would an already-depressed economy that is undershooting its inflation target (say, Europe/the US/Japan in 2012) want to lower real economic activity further? <br /><br />Second, that's a caricature of IS-LM. The framework is flexible enough to allow inflation expectations to shift.<br /><br />Third, what's the mechanism for the magic connector from the depressed economy in the short run from higher interest rates to the long-run growth? After all, in depressed economies, many firms go out of business, people drop out of the workforce, actual suicides happen, birth rates decline, people leave for greener pastures. Not all of this can be undone. <br />Doug Campbell https://www.blogger.com/profile/11028049845008665877noreply@blogger.comtag:blogger.com,1999:blog-4409551172339639840.post-38904210974346425322017-03-31T06:22:27.228-07:002017-03-31T06:22:27.228-07:00"Thus, you have to give up the central tenets..."Thus, you have to give up the central tenets of mainstream economics."<br /><br />No, that's the point. Neo-fisherite results are in fact mainstream. Essentially all mainstream macroeconomic models predict that higher nominal interest rates cause inflation to rise. But conventional views come from IS/LM/Phillips curve reasoning, with fixed expecations - I wouldn't hang my hat on that stuff.<br /><br />" If, in fact, higher interest rates raise growth and inflation..."<br /><br />No, I'm not saying that. Higher rates can indeed lower real economic activity in the short run.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.com