In May 2020. Congress had a choice as to whether to make the PPP repayable. I published a short piece on how to make it repayable without being burdensome to the businesses that would have that obligation. My question is whether, if the advances had been made repayable (and the repayment obligations enforced over a period of a few years) would the resulting net fiscal neutrality (or close to neutrality) likely have prevented the inflation?
I'm still waiting for someone to successfully convince me that a model with a Phillips curve and Taylor rule are even worth my time. Many have tried, none have succeeded. All of the other bells and whistles thrown on top of the 3 equation model, whether it be traditional Smets-Wouters style additions, or something newer like heterogeneous agents, are just band-aids on top of a shoddy foundation. As if I'm supposed to accept that obfuscating the core inadequacies of the model with more moving parts is somehow supposed to mitigate rather than amplify those inadequacies ("better fit" isn't a good argument!).
“‘Cause’ refers to all the counterfactuals along the way, not just to the initial spark. Had supply and demand shocks not happened, there would not have been inflation. But had monetary and fiscal policy reacted differently, there would equally not have been inflation. Monetary and fiscal policy are not blameless, helpless in the face of a shock.”
Well argued.
This is so obvious it is shocking (😏) to me that credible economists can argue otherwise.
One can surely argue whether monetary or fiscal policy is more responsible. That question is far from setttled.
And one can even make the case that given the “shock” that occurred during COVID it was good/wise/prudent to have done roughly what policy makers did, since perhaps if they did not real GDP would have been a lot worse. I don’t agree with that narrative, but it’s at least arguable.
But to deny the famous Milton Friedman claim when one also inserts “and/or fiscal” into it seems almost absurd.
“Following shock-accounting logic, one really should say that a lab-leak shock (or, if you prefer, a wet-market bat-eating shock) caused inflation. But that fact does not mean that we must focus entirely on lab safety and ignore monetary and fiscal policy if we wish to avoid inflation in the future.”
I strongly suspect JHC knows this full well, but…
Idk what was the root cause of the pandemic. I strongly suspect lab leak, but to this day we don’t know - and more likely than not will never know.
But if you want anyone left of center, and even some in the center, to engage more positively with your macroeconomic ideas, probably best to just replace the whole thing with “pandemic” shock and leave it at that. Or maybe “pandemic and associated economic shutdown policies and behaviors” shock.
Your example is predicated on the assumption that εₜ ~ N(0,ς²∙t) , and δₜ ~ N(0,σ²∙t) , where ς and σ are constant parameters. If, however, the exogenous variables εₜ and δₜ are generated by a Lévy process, then your mathematical model will be inappropriate even if we assume that the Lévy process has zero trend, and zero diffusion. Shocks of the magnitude experienced in the 2020 pandemic violate the implicit assumption in NK models that the perturbation from the equilibrium state is vanishingly small in the limit.
"Leaders in charge of fiscal and monetary policy did not wake up one morning and send people $5 trillion worth of checks out of the blue."
This is what you might call "an untested and untestable assumption", but that does not mean it didn't happen. Looking backwards now through the lens of all the other crazy things that "the experts" say didn't happen but actually DID happen and are now obvious to anyone with multiple firing neurons, I personally wouldn't put it past "the leaders" to do exactly that, knowing they could always blame "Covid".
There is a saying that goes something like this; "never assign malice as the cause for things that can be better explained by incompetence". However, in this case I might reverse that saying to; "never assign incompetence as the cause for things that can be better explained by malice"
JHC’s quoted sentence is a descriptive one about what actually did not happen, and is in fact accurate.
You are correct that as a predictive one about the future it might not be.
Towards your point, “Helicopter Ben” Bernanke famously pointed out that the Fed will never again allow sustained deflation, because if necessary it could drop the money from the sky.
Using Occam's razor to explain the 2020–2022 inflation suggests that the simplest and most direct explanation—relying on the fewest unproven assumptions—blames central bank policy and government stimulus. The core argument is summarized by Milton Friedman's famous maxim that "inflation is always and everywhere a monetary phenomenon."
You say you won't do the formal fitting there, but might still be interesting to see it somewhere.
----
I think the discussion about the movement in rates and inflation is really central to trying to work all this out. Anyone looking at this time period needs to grapple with the fact that inflation begins climbing in 2021 (April 2021 sees a big jump in both annual and monthly percent changes on both a core and headline basis), but interest rates really don't start moving meaningfully until 2022 (either real or nominal, so inflation breakevens also don't move until then). This is kind of in line with your comments about the models and being exact vs. hand-wavy about timing.
Regardless, I thought the FTPL part suggests that people go out and spend when they revise their expectations about the government paying back its debt, which also implies interest rates should move at that point. Prices may be sticky, so there is a delayed response, but you would think the market prices of debt (or inflation compensation investors demand for that debt) would be impacted immediately. Of course, prices at the short-run are impacted by what the Fed will do, but a 10/2 spread probably isn't showing anything meaningful until early 2022.
----
You also say "A “demand” shock is a shock to the IS curve, a change in the natural real interest rate or in the consumer’s impatience or discount factor, a ud,t. This shock raises output and inflation."
I tend to think about demand shocks in terms of the AS/AD model. The AD curve is derived from the IS curve, but also takes into account monetary policy as well. It might be more accurate to say that the "demand" shock is really a IS shock, which you pretty much do...but not everyone does in these exercises.
In May 2020. Congress had a choice as to whether to make the PPP repayable. I published a short piece on how to make it repayable without being burdensome to the businesses that would have that obligation. My question is whether, if the advances had been made repayable (and the repayment obligations enforced over a period of a few years) would the resulting net fiscal neutrality (or close to neutrality) likely have prevented the inflation?
I'm still waiting for someone to successfully convince me that a model with a Phillips curve and Taylor rule are even worth my time. Many have tried, none have succeeded. All of the other bells and whistles thrown on top of the 3 equation model, whether it be traditional Smets-Wouters style additions, or something newer like heterogeneous agents, are just band-aids on top of a shoddy foundation. As if I'm supposed to accept that obfuscating the core inadequacies of the model with more moving parts is somehow supposed to mitigate rather than amplify those inadequacies ("better fit" isn't a good argument!).
“‘Cause’ refers to all the counterfactuals along the way, not just to the initial spark. Had supply and demand shocks not happened, there would not have been inflation. But had monetary and fiscal policy reacted differently, there would equally not have been inflation. Monetary and fiscal policy are not blameless, helpless in the face of a shock.”
Well argued.
This is so obvious it is shocking (😏) to me that credible economists can argue otherwise.
One can surely argue whether monetary or fiscal policy is more responsible. That question is far from setttled.
And one can even make the case that given the “shock” that occurred during COVID it was good/wise/prudent to have done roughly what policy makers did, since perhaps if they did not real GDP would have been a lot worse. I don’t agree with that narrative, but it’s at least arguable.
But to deny the famous Milton Friedman claim when one also inserts “and/or fiscal” into it seems almost absurd.
“Following shock-accounting logic, one really should say that a lab-leak shock (or, if you prefer, a wet-market bat-eating shock) caused inflation. But that fact does not mean that we must focus entirely on lab safety and ignore monetary and fiscal policy if we wish to avoid inflation in the future.”
I strongly suspect JHC knows this full well, but…
Idk what was the root cause of the pandemic. I strongly suspect lab leak, but to this day we don’t know - and more likely than not will never know.
But if you want anyone left of center, and even some in the center, to engage more positively with your macroeconomic ideas, probably best to just replace the whole thing with “pandemic” shock and leave it at that. Or maybe “pandemic and associated economic shutdown policies and behaviors” shock.
Your example is predicated on the assumption that εₜ ~ N(0,ς²∙t) , and δₜ ~ N(0,σ²∙t) , where ς and σ are constant parameters. If, however, the exogenous variables εₜ and δₜ are generated by a Lévy process, then your mathematical model will be inappropriate even if we assume that the Lévy process has zero trend, and zero diffusion. Shocks of the magnitude experienced in the 2020 pandemic violate the implicit assumption in NK models that the perturbation from the equilibrium state is vanishingly small in the limit.
I cannot take seriously an explanatio of inflation/deflation/resessions or booms that leaves the Central bank out of the causal chain.
"Leaders in charge of fiscal and monetary policy did not wake up one morning and send people $5 trillion worth of checks out of the blue."
This is what you might call "an untested and untestable assumption", but that does not mean it didn't happen. Looking backwards now through the lens of all the other crazy things that "the experts" say didn't happen but actually DID happen and are now obvious to anyone with multiple firing neurons, I personally wouldn't put it past "the leaders" to do exactly that, knowing they could always blame "Covid".
There is a saying that goes something like this; "never assign malice as the cause for things that can be better explained by incompetence". However, in this case I might reverse that saying to; "never assign incompetence as the cause for things that can be better explained by malice"
JHC’s quoted sentence is a descriptive one about what actually did not happen, and is in fact accurate.
You are correct that as a predictive one about the future it might not be.
Towards your point, “Helicopter Ben” Bernanke famously pointed out that the Fed will never again allow sustained deflation, because if necessary it could drop the money from the sky.
"JHC’s quoted sentence is a descriptive one about what actually did not happen, and is in fact accurate."
And you know this how?
🙄
Using Occam's razor to explain the 2020–2022 inflation suggests that the simplest and most direct explanation—relying on the fewest unproven assumptions—blames central bank policy and government stimulus. The core argument is summarized by Milton Friedman's famous maxim that "inflation is always and everywhere a monetary phenomenon."
You say you won't do the formal fitting there, but might still be interesting to see it somewhere.
----
I think the discussion about the movement in rates and inflation is really central to trying to work all this out. Anyone looking at this time period needs to grapple with the fact that inflation begins climbing in 2021 (April 2021 sees a big jump in both annual and monthly percent changes on both a core and headline basis), but interest rates really don't start moving meaningfully until 2022 (either real or nominal, so inflation breakevens also don't move until then). This is kind of in line with your comments about the models and being exact vs. hand-wavy about timing.
Regardless, I thought the FTPL part suggests that people go out and spend when they revise their expectations about the government paying back its debt, which also implies interest rates should move at that point. Prices may be sticky, so there is a delayed response, but you would think the market prices of debt (or inflation compensation investors demand for that debt) would be impacted immediately. Of course, prices at the short-run are impacted by what the Fed will do, but a 10/2 spread probably isn't showing anything meaningful until early 2022.
----
You also say "A “demand” shock is a shock to the IS curve, a change in the natural real interest rate or in the consumer’s impatience or discount factor, a ud,t. This shock raises output and inflation."
I tend to think about demand shocks in terms of the AS/AD model. The AD curve is derived from the IS curve, but also takes into account monetary policy as well. It might be more accurate to say that the "demand" shock is really a IS shock, which you pretty much do...but not everyone does in these exercises.
Given that this is for your (great) book on inflation, you could direct the reader to the Businesses Cycle Accounting literature (https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-0262.2007.00768.x), but of course I am completely biased: https://onlinelibrary.wiley.com/doi/full/10.1111/joes.12581