Sure, the price index isn't the actual price of goods and services of the economy. It shows how the average price of a basket of goods and services evolves in time with a constant price of some year.
If my reasoning is correct, with sufficient data about the prices and quantity of this basket, the behavior of series should be appropriate to describe how the index evolves in time.
Therefore, why it isn't correct to state that the PV of the future government surpluses can describe the price level in t = 0?
The mechanism of transmission that I have in mind is the exchange rate. If I don't have confidence that the government will honor its commitment to the real return on public bonds issued, then I take the money to another more reliable country.
I think I understand your argument. But I also think you are being too rigid in saying that, since the Price Level (P) is not a directly observable variable, then the Fiscal Theory of the Price Level is not falsifiable, and therefore, it is not a scientific theory.
If we extend this reasoning to other areas of science, then no theory is scientific, because there is always an axiom that cannot be directly observed.
In the case of the General Price Level (P), the idea seems to be more a question of simplifying reality — for example, interpreting this concept as being a 'theoretical term' of the proposed theory — in the sense of 'as if' the complexity of the empirical reality of this class of knowledge could be summarized in this concept of the General Price Level (P).
In fact, one of Popper's criticisms of the exponents of the Vienna Circle is precisely that the first generation of logical empiricists adopted the criterion of direct and conclusive confirmation as a demarcation of knowledge as having significant content. In other words, a statement can only be considered scientific if it respects this condition.
If we take this to its ultimate consequences, any conclusion deduced from the use of 'theoretical terms' is not scientific. Therefore, for example, until recently atoms were not directly observed, so any deductive theory that assumed their existence — given that there is reasonable indirect evidence — as being true should not be considered scientific.
I believe that FTNP is indeed falsifiable to a certain extent; all we need to do is present an alternative explanation for the same phenomenon and place it under the scrutiny of empirical evidence. The result may be that one of the theories overrides the other, or even that they complement each other.
It was not my intention to propose something new or anything like that, I was just trying to use my current stock of knowledge in undergraduate economic theory to better understand economic reality.
If it is consensually established that the Price Level Fiscal Theory is not a scientific theory, then it must be. It's very unlikely that I'm right and everyone else is wrong. 😅
Where is the error in this generalized version of the standard (fallacious?) story? A supply shock decreases the supply of some set of goods X, which decreases Y (real GDP). If we hold money supply M fixed, we would expect P to rise such that PY remains in the same proportion to M. Even if the relative prices of the goods in set ~X fall, their fall does not counterbalance the overall rise, because in sum we have the same money supply M chasing fewer goods Y.
Correct. The negative supply shock with no change in inflation in the presence of downwardly sticky prices would lead to some markets not clearing, exacerbating the fall in real income.
"If there are not enough TVs to go around, TV prices must rise relative to wages or food. But that doesn’t explain why TV prices go up rather than food prices going down. It really doesn’t explain why all prices and wages go up."
We measure the price level as an index of prices eg CPI. Therefore an increase in the price level as reported by statistical agencies does not require that all prices go up, just that the prices that go up more than offset the prices that go down.
So it seems to me that the issue RE supply shocks and price level is not whether supply shocks can make all prices go up, but whether they can cause some prices to go up by more than other prices go down.
Now, my question is: in CGE model simulations, the price index often increases following a tariff increase, or a negative sectoral productivity shock. Does this only happen because these models do not incorporate money? Or does this suggest that a supply shock could increase the price level in the real world?
I would like to see a bit more concreteness about the macroeconomic and practical definition of inflation. Usually, as you have as well, we measure inflation with cpi or comparable statistic. But always and everywhere monthly cpi figure includes both relative and aggregate price changes. So how do you separate those two, overall and relative, in practice?
If, say, tariffs raise overall prices measured by the cpi, how do you infer in practice that it's only a matter of relative price changes?
Am I mistaken when I think that given your argumentation, cpi shouldn't actually even be used as the measure of inflation on a month-to-month basis? Kind of like hardcore montetarists who say that cpi has no meaning, it's only about the growth of monetary aggregates.
I believe this is explained in the post. The point is that PY actually increased, which is not explained by the supply shock.
If PY had not increased, then indeed P could go up, if the prices and quantities of ~X remained constant (not necessarily the case in GE), but then you would also have the reverse once the shock fades. No general increase of inflation.
Tariffs my be terrible economic policy if world wide economic growth is your only priority. Are they worse than income or sales taxes (NO). If the federal government needs revenue, and of course it does, I'd argue they are the best way to raise it.
In America we already pay a VAT—health insurance. So every service and good you purchase in America includes someone else’s health care costs. So I would be very careful about adding another VAT in America because health care is so important.
Taxes on intermediate goods are indeed worse than sales taxes on end user goods only, and are indeed probably worse than relatively low, flat income taxes.
You’re correct that tariffs are probably less worse than high marginal income taxes and just as bad as sales taxes that apply to intermediate goods.
However, you are ignoring the fact that tariffs are much more likely to kick off a trade war making all worse off in a way that other taxes are not.
Great exposition and thank you for taking the time.
A couple of authors, from an earlier time, who corroborate your view are Vining and Elwertowski AER circa 1976. The big deal of this paper is about the extent to which prices ($/per unit) are perfectly flexible. As Friedman notes, if they are, a change in relative prices is not correlated with a change in inflation because individuals' budget constraint forces a reallocation of expenditures from the product with a higher price to other products. This reallocation induces additional price changes in the other direction leaving, presumably, the inflation rate unchanged.
When over time, year after year, for as far as the eye can see, you spend and monetize two trillion dollars per year, you have a very high probability of creating inflation. Printing your way to prosperity has never worked historically, and this time is no different. Buckle up.
Isn't it wrong to think of a supply shock here as a relative price change alone?
In simple FTPL with economic growth, if output falls and surpluses are fixed in terms of % of GDP then presumably an oil shock doesn't require more money to lead to an increase in the price level (and generate inflation when you put in sticky prices).
In a sense perhaps I'm not disagreeing here but to keep surpluses constant in terms of the actual real resources they need to raise as a % of GDP to avoid an increase in the overall price level?
----
Could you clarify the role of inside money for me in FTPL? It's something I've never fully grasped.
e.g. If people/banks expect higher inflation (even if they shouldn't 'rationally') they might demand higher wages or firms may want to put up prices. Just thinking of outside money there might not be a change but isn't this where private money steps in? They go to the banks and ask to borrow more money, which the banks are happy to create because they also expect higher inflation. What am I missing?
In the simple FTPL, people can create all the inside money they want to make transactions, but that has no effect on the price level. Just as people can create options and futures, but that has no effect on stock prices. If you add frictions you can get some effect.
Sorry, I didn’t quite understand. Why doesn't the inside money factor allow for cost-push inflation?
If there is a rise in energy prices, couldn’t we have, on the one hand, an inflationary spiral dynamic driven by the bargaining between profits and wages, and, on the other, financial firms meeting the growing demand for money? Wouldn’t that be possible?
There is an implicit sanctioning by the monetary authority of the newly created money, but the other option would be an increase in interest rates (since maintaining an exogenous money supply would require losing control over its "price," i.e., the interest rate).
I don’t think I disagree with any of this as a matter of economics, but it seems to miss the politically salient point. If you define inflation (correctly as a matter of economics) as the rate of change of the overall price level that can occur only because of a change in the nominal anchor, then of course a tax like a tariff that doesn’t change the nominal anchor isn’t going to change inflation.
But what we learned from the last election is that as a matter of politics, people didn’t care about inflation defined that way. At the time of the election, inflation defined that rate was down and real wages have been rising. The CPI from September 2023 to September 2034 rose only 2.4%. But people were still angry because what they cared about was not the rate of change of an abstract level of “overall prices” but rather the absolute price level for consumer goods. And every time they walked into a grocery or restaurant and saw prices that were significantly higher than 4 years ago, it made them angry. That’s what voters classified as “inflation.”
So if we impose news taxes like tariffs on imported goods (which include a large share of what people consume today and for which there often aren’t readily available domestic substitutes), that will create a long-lasting increase in the relative price level of consumer goods—i.e., inflation as voters define it. Good luck with the political repercussions of that.
Fair point. Though I’m not sure even real wages are what drive voters most. The Fed’s index of real wages rose from 352 in Q1 2017 (Trump’s first quarter), to 362 in Q4 2019 (last quarter before the pandemic), to 371 in Q3 2024 (the latest available). So real wage growth wasn’t awful under Biden. But voters didn’t care. Everyday in every one of their purchases they saw *price levels* that were higher than in 2019 and that weren’t going down, which made them feel poorer regardless of their real wages.
One last point: even to the extent that people recognize that their real wages have gone up, that still won’t negate people’s anger about price levels. People tend to attribute higher wages to their own personal merit, but higher prices to the government. So the government’s higher prices are blamed for taking away the full value of the extra wages that each individual thinks he or she has earned.
On the notes about the data there is: "(...) it excludes all self-employed persons, both those with incorporated businesses and those with unincorporated businesses."
I'm not familiriaze with stylized facts about US economy, but what's the share of the self-employed persons on the US economy?
It's possible that this share of voters that are unhappy with Bidens government.
I think it’s more that Biden promised a return to normalcy and then August 2021 happened and people lost confidence in his leadership…very similar to August 2005 when Bush won reelection in spite of a suboptimal economy and then everything started going wrong. Biden recovered but the right wing echo chamber still drilled into the heads of 50% of the population that he was a failure and everything was his fault.
Biden “recovered” only his own-goal of creating high inflation.
As the chart provided shows, he did NOT increase median earnings. Let alone 35th %ile earnings (I.e. the median for the non-elite, mostly non-college educated that make up Trump’s base)
The chart shows median wage growth was punk over the 5 year period dating from the start of COVID - and of course down during the course of Biden’s presidency! With just a very small rise at the end
And these numbers don’t show it, but I suspect if you limited the numbers to only the bottom 70% of wage earners, real earnings likely declined even more than this for the bottom 70% (I.e. roughly removing the college educated “elites” that are now the Dem base).
"A supply shock only causes overall inflation if monetary and fiscal policy respond to the supply shock by increasing demand"
I agree 100% with you!
In fact, it is possible to go a little further. In an inflation and interest rate target regime, the Central Bank determines the interest rate target discreetly at determined periods.
In this way, supply shocks can be accommodated by a monetary expansion necessary to maintain the interest rate at the established target.
The reasoning behind this is that a supply shock that increases production costs can increase the demand for money needed to produce the same quantity of goods by firms.
This can occur if there is some market imperfection that prevents instantaneous upward price adjustment. For example, in oligopolistic market structures, it may be strategic to wait as long as possible before raising prices, otherwise demand will go to competitors who have not yet readjusted their prices.
I think the central economic issue is the attempt to recover the purchasing power of wages, on the part of workers, and the attempt to maximize profits on the part of firms. Not in the sense of greedinflation.
Theoretically, this interaction should bring the economy to Pareto efficient equilibrium, where the relative prices maximize the objetive function of all — or almost all —economic agents.
But there seems to be a lot of noise in this interaction.
Tariffs can generate tax revenue for the Treasury. But, it appears that the idea is more in relation to protecting the internal market from external competition, based on the argument of maintaining employment in the national industry.
The tradeoff appears to be between the real salary of all workers employed — if I got it right, this is the relative price level ideia — and maintaining the real salary of workers in sectors threatened by external competition.
I'd like to see more on this, with attention to formal models in your usual informal way. Will a 10% tariff on imported goods result in inflation? How? In the simplest MV=PT model, there's no inflation-- tariffs go up, import prices rise, and enough other prices fall to result in prices staying the same. That's not the model anybody uses now, but in state-of-the-art models, what does happen? Relative prices will change, but what happens to the overall price level, in an ideal index or as we measure prices?
I'd really like to know. I have very little idea, except that, as the post here says, supply shocks usually result in fiscal and monetary expansion, and thus have at least an indirect effect in causing inflation.
Some textbooks like to represent this model in the form of continuous growth.
The ideia is, if the economy are at the long-run equilibrium necessary to stabilize the inflation rate at the target, the money growth rate should be approximately dM/dt = (dP/dt + dY/dt)
Good note
I didn't get it.
Sure, the price index isn't the actual price of goods and services of the economy. It shows how the average price of a basket of goods and services evolves in time with a constant price of some year.
If my reasoning is correct, with sufficient data about the prices and quantity of this basket, the behavior of series should be appropriate to describe how the index evolves in time.
Therefore, why it isn't correct to state that the PV of the future government surpluses can describe the price level in t = 0?
The mechanism of transmission that I have in mind is the exchange rate. If I don't have confidence that the government will honor its commitment to the real return on public bonds issued, then I take the money to another more reliable country.
I think I understand your argument. But I also think you are being too rigid in saying that, since the Price Level (P) is not a directly observable variable, then the Fiscal Theory of the Price Level is not falsifiable, and therefore, it is not a scientific theory.
If we extend this reasoning to other areas of science, then no theory is scientific, because there is always an axiom that cannot be directly observed.
In the case of the General Price Level (P), the idea seems to be more a question of simplifying reality — for example, interpreting this concept as being a 'theoretical term' of the proposed theory — in the sense of 'as if' the complexity of the empirical reality of this class of knowledge could be summarized in this concept of the General Price Level (P).
In fact, one of Popper's criticisms of the exponents of the Vienna Circle is precisely that the first generation of logical empiricists adopted the criterion of direct and conclusive confirmation as a demarcation of knowledge as having significant content. In other words, a statement can only be considered scientific if it respects this condition.
If we take this to its ultimate consequences, any conclusion deduced from the use of 'theoretical terms' is not scientific. Therefore, for example, until recently atoms were not directly observed, so any deductive theory that assumed their existence — given that there is reasonable indirect evidence — as being true should not be considered scientific.
I believe that FTNP is indeed falsifiable to a certain extent; all we need to do is present an alternative explanation for the same phenomenon and place it under the scrutiny of empirical evidence. The result may be that one of the theories overrides the other, or even that they complement each other.
OK, no problem.
It was not my intention to propose something new or anything like that, I was just trying to use my current stock of knowledge in undergraduate economic theory to better understand economic reality.
If it is consensually established that the Price Level Fiscal Theory is not a scientific theory, then it must be. It's very unlikely that I'm right and everyone else is wrong. 😅
I'm just a curious here.
Tariffs have absolutely nothing to do with inflation.
Inflation is the effect of the loss of the store of value of money
Monetary policy has an impact on the short-term value of money.
But fiscal policy and it's anticipated impact on Sovereign debt is the determinant variable of the medium and long term value of money
Tariffs are an impediment on the operations of the economy that produces goods and services
Money is a piece of paper
Where is the error in this generalized version of the standard (fallacious?) story? A supply shock decreases the supply of some set of goods X, which decreases Y (real GDP). If we hold money supply M fixed, we would expect P to rise such that PY remains in the same proportion to M. Even if the relative prices of the goods in set ~X fall, their fall does not counterbalance the overall rise, because in sum we have the same money supply M chasing fewer goods Y.
Correct. The negative supply shock with no change in inflation in the presence of downwardly sticky prices would lead to some markets not clearing, exacerbating the fall in real income.
Thanks for this.
So inflation is in fact (almost) everywhere and (almost) always a monetary phenomenon?
Thank, you sir, for answering my question (in your latest post):
“Inflation always and everywhere comes from monetary and fiscal policy, directly or from accommodation” - John Cochrane
https://substack.com/home/post/p-154170692
Without "almost"
Well, no, JHC says it could be from fiscal policy…
Does a full barter economy have inflation?
I have a question.
"If there are not enough TVs to go around, TV prices must rise relative to wages or food. But that doesn’t explain why TV prices go up rather than food prices going down. It really doesn’t explain why all prices and wages go up."
We measure the price level as an index of prices eg CPI. Therefore an increase in the price level as reported by statistical agencies does not require that all prices go up, just that the prices that go up more than offset the prices that go down.
So it seems to me that the issue RE supply shocks and price level is not whether supply shocks can make all prices go up, but whether they can cause some prices to go up by more than other prices go down.
Now, my question is: in CGE model simulations, the price index often increases following a tariff increase, or a negative sectoral productivity shock. Does this only happen because these models do not incorporate money? Or does this suggest that a supply shock could increase the price level in the real world?
I think it happens because they assume no price actually falls. All change in relative prices is by some prices increasing.
Prices in CGE models can decrease as well as increase
Great post, thanks again.
I would like to see a bit more concreteness about the macroeconomic and practical definition of inflation. Usually, as you have as well, we measure inflation with cpi or comparable statistic. But always and everywhere monthly cpi figure includes both relative and aggregate price changes. So how do you separate those two, overall and relative, in practice?
If, say, tariffs raise overall prices measured by the cpi, how do you infer in practice that it's only a matter of relative price changes?
Am I mistaken when I think that given your argumentation, cpi shouldn't actually even be used as the measure of inflation on a month-to-month basis? Kind of like hardcore montetarists who say that cpi has no meaning, it's only about the growth of monetary aggregates.
A change in the price index in which some prices go up more than others implies some change in relative prices. What is there to "separate?"
I believe this is explained in the post. The point is that PY actually increased, which is not explained by the supply shock.
If PY had not increased, then indeed P could go up, if the prices and quantities of ~X remained constant (not necessarily the case in GE), but then you would also have the reverse once the shock fades. No general increase of inflation.
Great post ! Simply explained for ordinary humans comprehension, like the graphics :) No Econ-physics algebraic equations ! Thanks
Tariffs my be terrible economic policy if world wide economic growth is your only priority. Are they worse than income or sales taxes (NO). If the federal government needs revenue, and of course it does, I'd argue they are the best way to raise it.
If we called it a VAT and earmarked it to refund payroll taxes, economists would fall over themselves to endorse it.
But tariffs have a whiff of nationalism and racism so it offends economists culture war sensibilities more than a VAT.
In America we already pay a VAT—health insurance. So every service and good you purchase in America includes someone else’s health care costs. So I would be very careful about adding another VAT in America because health care is so important.
Taxes on intermediate goods are indeed worse than sales taxes on end user goods only, and are indeed probably worse than relatively low, flat income taxes.
You’re correct that tariffs are probably less worse than high marginal income taxes and just as bad as sales taxes that apply to intermediate goods.
However, you are ignoring the fact that tariffs are much more likely to kick off a trade war making all worse off in a way that other taxes are not.
Great exposition and thank you for taking the time.
A couple of authors, from an earlier time, who corroborate your view are Vining and Elwertowski AER circa 1976. The big deal of this paper is about the extent to which prices ($/per unit) are perfectly flexible. As Friedman notes, if they are, a change in relative prices is not correlated with a change in inflation because individuals' budget constraint forces a reallocation of expenditures from the product with a higher price to other products. This reallocation induces additional price changes in the other direction leaving, presumably, the inflation rate unchanged.
When over time, year after year, for as far as the eye can see, you spend and monetize two trillion dollars per year, you have a very high probability of creating inflation. Printing your way to prosperity has never worked historically, and this time is no different. Buckle up.
How can the Doge coin (or any crypto) make the price of goods cheaper?
I think Cochrane is referring about the Department of Government Efficiency (DOGE).
Ok, that'd make more sense. Thanks.
Nice article.
A couple of questions.
------
Isn't it wrong to think of a supply shock here as a relative price change alone?
In simple FTPL with economic growth, if output falls and surpluses are fixed in terms of % of GDP then presumably an oil shock doesn't require more money to lead to an increase in the price level (and generate inflation when you put in sticky prices).
In a sense perhaps I'm not disagreeing here but to keep surpluses constant in terms of the actual real resources they need to raise as a % of GDP to avoid an increase in the overall price level?
----
Could you clarify the role of inside money for me in FTPL? It's something I've never fully grasped.
e.g. If people/banks expect higher inflation (even if they shouldn't 'rationally') they might demand higher wages or firms may want to put up prices. Just thinking of outside money there might not be a change but isn't this where private money steps in? They go to the banks and ask to borrow more money, which the banks are happy to create because they also expect higher inflation. What am I missing?
In the simple FTPL, people can create all the inside money they want to make transactions, but that has no effect on the price level. Just as people can create options and futures, but that has no effect on stock prices. If you add frictions you can get some effect.
thanks John
Sorry, I didn’t quite understand. Why doesn't the inside money factor allow for cost-push inflation?
If there is a rise in energy prices, couldn’t we have, on the one hand, an inflationary spiral dynamic driven by the bargaining between profits and wages, and, on the other, financial firms meeting the growing demand for money? Wouldn’t that be possible?
There is an implicit sanctioning by the monetary authority of the newly created money, but the other option would be an increase in interest rates (since maintaining an exogenous money supply would require losing control over its "price," i.e., the interest rate).
I don’t think I disagree with any of this as a matter of economics, but it seems to miss the politically salient point. If you define inflation (correctly as a matter of economics) as the rate of change of the overall price level that can occur only because of a change in the nominal anchor, then of course a tax like a tariff that doesn’t change the nominal anchor isn’t going to change inflation.
But what we learned from the last election is that as a matter of politics, people didn’t care about inflation defined that way. At the time of the election, inflation defined that rate was down and real wages have been rising. The CPI from September 2023 to September 2034 rose only 2.4%. But people were still angry because what they cared about was not the rate of change of an abstract level of “overall prices” but rather the absolute price level for consumer goods. And every time they walked into a grocery or restaurant and saw prices that were significantly higher than 4 years ago, it made them angry. That’s what voters classified as “inflation.”
So if we impose news taxes like tariffs on imported goods (which include a large share of what people consume today and for which there often aren’t readily available domestic substitutes), that will create a long-lasting increase in the relative price level of consumer goods—i.e., inflation as voters define it. Good luck with the political repercussions of that.
I might have added "don't confuse inflation with real wages." Thanks.
Fair point. Though I’m not sure even real wages are what drive voters most. The Fed’s index of real wages rose from 352 in Q1 2017 (Trump’s first quarter), to 362 in Q4 2019 (last quarter before the pandemic), to 371 in Q3 2024 (the latest available). So real wage growth wasn’t awful under Biden. But voters didn’t care. Everyday in every one of their purchases they saw *price levels* that were higher than in 2019 and that weren’t going down, which made them feel poorer regardless of their real wages.
https://fred.stlouisfed.org/series/LES1252881600Q
One last point: even to the extent that people recognize that their real wages have gone up, that still won’t negate people’s anger about price levels. People tend to attribute higher wages to their own personal merit, but higher prices to the government. So the government’s higher prices are blamed for taking away the full value of the extra wages that each individual thinks he or she has earned.
On the notes about the data there is: "(...) it excludes all self-employed persons, both those with incorporated businesses and those with unincorporated businesses."
I'm not familiriaze with stylized facts about US economy, but what's the share of the self-employed persons on the US economy?
It's possible that this share of voters that are unhappy with Bidens government.
I think it’s more that Biden promised a return to normalcy and then August 2021 happened and people lost confidence in his leadership…very similar to August 2005 when Bush won reelection in spite of a suboptimal economy and then everything started going wrong. Biden recovered but the right wing echo chamber still drilled into the heads of 50% of the population that he was a failure and everything was his fault.
Biden “recovered” only his own-goal of creating high inflation.
As the chart provided shows, he did NOT increase median earnings. Let alone 35th %ile earnings (I.e. the median for the non-elite, mostly non-college educated that make up Trump’s base)
Your chart is hardly evidence for your point.
The chart shows median wage growth was punk over the 5 year period dating from the start of COVID - and of course down during the course of Biden’s presidency! With just a very small rise at the end
And these numbers don’t show it, but I suspect if you limited the numbers to only the bottom 70% of wage earners, real earnings likely declined even more than this for the bottom 70% (I.e. roughly removing the college educated “elites” that are now the Dem base).
"A supply shock only causes overall inflation if monetary and fiscal policy respond to the supply shock by increasing demand"
I agree 100% with you!
In fact, it is possible to go a little further. In an inflation and interest rate target regime, the Central Bank determines the interest rate target discreetly at determined periods.
In this way, supply shocks can be accommodated by a monetary expansion necessary to maintain the interest rate at the established target.
The reasoning behind this is that a supply shock that increases production costs can increase the demand for money needed to produce the same quantity of goods by firms.
This can occur if there is some market imperfection that prevents instantaneous upward price adjustment. For example, in oligopolistic market structures, it may be strategic to wait as long as possible before raising prices, otherwise demand will go to competitors who have not yet readjusted their prices.
I think the central economic issue is the attempt to recover the purchasing power of wages, on the part of workers, and the attempt to maximize profits on the part of firms. Not in the sense of greedinflation.
Theoretically, this interaction should bring the economy to Pareto efficient equilibrium, where the relative prices maximize the objetive function of all — or almost all —economic agents.
But there seems to be a lot of noise in this interaction.
Tariffs can generate tax revenue for the Treasury. But, it appears that the idea is more in relation to protecting the internal market from external competition, based on the argument of maintaining employment in the national industry.
The tradeoff appears to be between the real salary of all workers employed — if I got it right, this is the relative price level ideia — and maintaining the real salary of workers in sectors threatened by external competition.
I'd like to see more on this, with attention to formal models in your usual informal way. Will a 10% tariff on imported goods result in inflation? How? In the simplest MV=PT model, there's no inflation-- tariffs go up, import prices rise, and enough other prices fall to result in prices staying the same. That's not the model anybody uses now, but in state-of-the-art models, what does happen? Relative prices will change, but what happens to the overall price level, in an ideal index or as we measure prices?
I'd really like to know. I have very little idea, except that, as the post here says, supply shocks usually result in fiscal and monetary expansion, and thus have at least an indirect effect in causing inflation.
Some textbooks like to represent this model in the form of continuous growth.
The ideia is, if the economy are at the long-run equilibrium necessary to stabilize the inflation rate at the target, the money growth rate should be approximately dM/dt = (dP/dt + dY/dt)
But I'm not sure about that. 😅