What does it mean to say that something is inflationary? (part 2)
Let’s try again. Here’s how I would answer the question: Is X inflationary?
1. Under successful inflation targeting, X is not inflationary.
2. Under successful NGDP targeting, X is inflationary if it reduces RGDP.
3. Under money supply targeting, X is inflationary if it reduces real money demand (perhaps due to higher V or lower Y)
4. Under interest rate targeting, X is inflationary if it raises the natural rate of interest.
5. Under a fixed exchange rate regime, X is inflationary if it raises the equilibrium real exchange rate.
6. Under the gold standard, X is inflationary if it raises the supply of gold or reduces the demand for gold.
7. Under a successful Taylor Rule, X is inflationary if it creates a negative output gap.
In these examples, X might be fiscal stimulus. It might be an increase in the minimum wage. It might be supply chain problems. it might be an oil shock. It might be an increase in monopoly power. It could be anything. And my answer is always the same. The answer depends on the monetary regime.
The seven answers above apply to any shock, of any type. If there’s war in the Ukraine, the list above gives you your answer. If the woke people take over America, the list above gives you your answer. If vaccines wipe out most of our population in three years (as some Republicans expect), the list above tells you the effect on inflation.
The answer always depends on the monetary regime.
This is frustrating to many people. We want a simple answer. We want to know the impact of X holding monetary policy constant. But I’ve just shown you seven different ways of holding monetary policy constant. Which one did you have in mind?
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26. January 2022 at 04:55
(Great posts!)
26. January 2022 at 05:19
Excellent post.
Perhaps the regime many people have in mind is partially successful inflation targeting. (also, in #7, should that read positive output gap?)
26. January 2022 at 06:15
Excellent and much needed post.
26. January 2022 at 07:09
Scott, this is off-topic but I’ve wanted to ask you that for a long time.
If I understand your model correctly recessions are caused by negative shocks to NGDP. (Most recessions anyway. The covid recession is an example of “normal” recession. Where prices go up and there is no unemployment)
This is an oversimplification of your model but I hope you agree that it is roughly correct. I would like to know if you think the same thing(negative NGDP shocks) caused recessions in the 19th century and earlier, before modern central banks tried guiding the nominal economy. Maybe the question can be paraphrased as: What causes negative NGDP shocks under the gold standard?
26. January 2022 at 07:14
The first two statement are definitionally true but I think the others are assuming that X only has one effect and leaves RGDP unchanged.,
To case case 3: If X both decreases money demand and increases RDGP it will not necessarily be inflationary.
26. January 2022 at 07:58
Why is this relavant at all?
The monetary policy system is designed, from top down, to manipulate the value of currencies. Precisely, why do you think the IMF buys and sells currencies. Do you think they do this because their wonderful government busybodies with your best interest in mind? Of course, not. It’s designed to stablize the currencies, i.e., keep them at roughly the same value, and to redistribute wealth to countries for BUSINESS PURPOSES (infastructure to haul supplies). In other words, they completely control the uppward and downward mobility. Play by the rules, and you move up. Don’t play by their rules, and you get crushed.
Why do you think they go after countries like Costa Rica, with such vehement rhetoric, slander, and threats of sanctions, when Costa Rica uses Bitcoin as their legal tender?
Costa Rica is now removing themselves from the tyrannical heirarchy of global finance. If more countries do that, currencies that are inflated by supranational purchases will become unstable. The IMF will lose its ability to control the value of currencies, issue sanctions, control the flight of capital, provide zero risk loans for banks, etc, etc.
In other news, we now know that four university professors were given 50M in grants to propogate that the virus was of “natural origin” without any evidence whatsoever. We now have hundreds of thousands of cases of myocarditis, and three more independent studies showing the dangers of taking the vaccine. Truckers are driving for freedom against tyrannical regulations, Biden is witholding antibodies from Florida & Texas, and the CCP is on the doorstep of India and Taiwan, while Nato is trying to bait russia by stock piling weapons in Ukraine.
But Sumner is worried whether crypto might be inflationary or deflationary……
Weird. But nice pivot.
26. January 2022 at 08:54
Classical, My understanding of the Taylor Rule is that if output is below potential then the Fed should push inflation above 2%. Someone correct me if that’s wrong.
Ognian, They were caused by increases in the demand for gold, probably due to a fall in interest rates. Robert Barsky and Larry Summers did a paper on that issue.
Market, No, you are confusing money demand with velocity. Real money demand is M/P, which equals Y/V.
26. January 2022 at 09:55
@Scott:’you are confusing money demand with velocity’
Thanks, I see I was assuming money demand and velocity are synonymous and missed that you had specified real money demand .
However does my objection not still apply yo 6 ? If X is rising productivity and it causes both gold supply and the supply of all other goods to increase proportionately there will not necessarily be inflation.
26. January 2022 at 10:00
Excellent on all the “what ifs”—really good.
P.S. Also love the “some republicans say vaccines will kill everyone”. Did you know that John Stockton is not a republican? My evidence? I cannot find any story that states his political party–:-) Still looking.
26. January 2022 at 10:01
The one I had in mind is the current actual monetary regime, in which, no doubt, the Fed is (actually successfully) targeting something. In spite of (slightly vague and not fully credible) policy statements from the Fed, I do not know how else specify this target; evidently it is not one of your seven.
26. January 2022 at 10:55
>the Fed is (actually successfully) targeting something…it is not one of your seven
Exactly…the Fed is not just a disembodied algorithm ingesting data and spitting out an policy response (though that would probably be better?)…the Fed is not legally bound to do anything and cannot bind itself to take any specific actions in the future (though that might be better?)
Central banks are just groups of humans who have developed a theory of mind about the populace and are trying to take actions that will elicit a behavioral response. The investing populace, in turn, is constantly trying to develop a theory of mind about the members of the central bank to predict their future actions.
26. January 2022 at 10:56
13 years of reading this blog, and I forgot all the definitions except 2. Thanks for a reminder!
26. January 2022 at 14:16
> “We want to know the impact of X holding monetary policy constant.”
I do think that’s the key to how most people (even most economists!) get this analysis wrong.
Most people have a (bad) intuitive model, where the Fed is planning to take some future actions, and they want the economic change (fiscal stimulus, minimum wage, etc.) to happen, while having the Fed take the exact same concrete actions.
But that’s actually not what “holding monetary policy constant” even means!
The Fed does not pre-plan a series of future concrete actions (OMOs). Instead, the Fed’s policy is to “do what is necessary” to achieve some specific economic effect (like an interest rate target). When the Fed makes that decision, it doesn’t even know itself just what final set of concrete actions will result in that effect. The Fed is a feedback control system, a thermostat, continuing to emit actions until it senses the goal is on target.
I think that is the fundamental conflict with people’s intuitions. They don’t realize that the Fed doesn’t need to “take into account” any of these changes (fiscal stimulus, minimum wage, etc.). It doesn’t need to make any different decisions. The way it operates, without changing policy at all — without even necessarily knowing about the other factors — the Fed will automatically “offset” whatever naive effect the troubling economic policy would intuitively have had.
26. January 2022 at 15:06
This is a helpful theoretical exercise – but the big problem is we don’t know what is being targeted and/or how credible that commitment is. There are many things one may have claimed were “not inflationary” under our inflation-targeting regime which turned out to actually be inflationary in real life (once we discovered the Fed is willing to tolerate very large inflation overshoots). It’s all murky at best.
26. January 2022 at 15:44
As others have said, this is a great post. Just when you think that an idea can’t be framed with greater insight. (Though it wouldn’t shock me to discover we’ve seen something pretty close to this formulation before).
This would make a good rainbow yard sign. “In this house….” (One could put it next to one’s “neoliberal” rainbow yard sign).
26. January 2022 at 16:42
Market, You said:
“If X is rising productivity and it causes both gold supply and the supply of all other goods to increase proportionately there will not necessarily be inflation.”
In that case, gold demand also rises (which is why you get no inflation.)
Michael, Look at his face! I’ve never seen a more Republican face.
Philo, Supply problem were certainly inflationary under this regime.
Vaidas, Thanks for sticking around.
Thanks everyone, I never know when people will like a post. I’m always surprised.
26. January 2022 at 18:25
‘In that case, gold demand also rises (which is why you get no inflation.)’
I agree, but am I missing something or wouldn’t that still mean that ‘Under the gold standard, X is inflationary if it raises the supply of gold or reduces the demand for gold.’ is not true under all circumstances ?
26. January 2022 at 21:58
” If vaccines wipe out most of our population in three years (as some Republicans expect)”
https://stevekirsch.substack.com/p/icymi-cdc-just-published-a-paper
26. January 2022 at 22:09
Leonis Eltern was brutally raped and murdered today by four Afghan man. She was 13 years old.
You won’t hear about it in the mainstream media.
They won’t show pictures of her on the front page.
They won’t condemn the killers.
Sadly, they won’t do any of this becuase she’s white.
Another silent victim of Sumner’s woke multiculturalism.
27. January 2022 at 07:51
Agree with others that it is a good post.
One distinction would be on #2 if you switch to level targeting rather than growth targeting, then a decline in trend real GDP could also cause inflation. I don’t think the same would be true about switching to price level targeting in #1.
27. January 2022 at 10:56
Market, No, it’s true by definition.
27. January 2022 at 12:05
Scott,
For ‘Under the gold standard, X is inflationary if it raises the supply of gold or reduces the demand for gold.’
I’m still not getting how an X that raises the supply of gold and also raises the supply of everything else to the same or a greater extent will be inflationary.
28. January 2022 at 10:48
Market, Are you assuming that the rise in RGDP also raises real gold demand? In that case, you get no inflation. If it doesn’t raise real gold demand then prices rise by as much as gold supply. Real gold demand is G/P
28. January 2022 at 19:38
My thinking is that if productivity rises under the gold standard but the gold supply is fixed then prices would fall. If the gold supply also rises then this may counter the price fall.
I think that real gold demand might rise as RGDP rises but I’m not assuming that – only that more gold chasing more goods might cancel each other out.
28. January 2022 at 21:15
Scott, your gold standard answer is incomplete, I suspect?
Velocity is important. Though I don’t know for sure whether that’s already included in your demand for gold factor?