Note: This article would hopefully be worked into my banking manuscript. I think it overlaps other article(s), but I wanted to see how this line of argument looks. Needless to say, I have no put the articles into a single document… One of the difficulties with understanding banking is that one needs to use relatively complex macro models to see how the formal banking system interacts with the non-bank financial system. Analysis based on looking at the motivations of a single bank or based on models where only the formal banking system exists will be misleading. Stock-flow consistent (SFC) m ..read more

I recently wrote about r*, which is now the preferred way to refer to the “neutral” or “natural rate” of interest (in real terms). Although my concerns appear hand-wavy, there is a way of expressing them mathematically. I have discussed this in the past, but I hope this version is cleaner. The first thing to note is that there are multiple ways of estimating r*. I am not too concerned about which one is used, since the ones that I have seen share an important property, which I will shortly describe. The estimation algorithm is based upon a number of time series inputs. For my purposes, I di ..read more

The BIS Quarterly Review had a recent paper on r* (the preferred term for the “natural rate of interest”) by Benigno, Gianluca, Boris Hofmann, Galo Nuño Barrau, and Damiano Sandri. “Quo vadis, r*? The natural rate of interest after the pandemic.” This paper is an example of why I have largely given up on the DSGE literature. From my perspective, the contents may be summarised as: The authors describe r*, which is a necessary empirical complement to the dynamic stochastic general equilibrium (DSGE) literature. The DSGE literature assumes that the policy rate (and its expected path) are a k ..read more

Steve Keen recently wrote “I’m not Discreet, and Neither is Time” in which he discusses the alleged defects of discrete time models as opposed to continuous time ones. (In discrete time, the model state is defined on a time axis that can be labelled as integers: step 1, step 2, etc. In a continuous time, a model’s time axis is the real axis. A discrete time model can be thought of as being defined by difference equations, while continuous time is normally defined by differential equations.) Steve Keen has different modelling priorities than I do, so I will not attempt to respond to him poin ..read more

This is an unedited manuscript excerpt, from a chapter that discusses how asset price changes relate to inflation. Even if one believes that asset price increases represent inflation, the general reaction among North American central bankers would be to think you are crazy if you think asset prices should be included within an inflation target mandate. (I am less sure about the reaction of Continental European central bankers.) Although they might accept that exuberance in financial markets should be toned down, targeting asset prices directly poses many problems. Embedded in this reaction ..read more

Since I am still chugging away with edits, I have not been spending much time watching developments in markets. I just wanted to off some brief comments on events from central banks last week. I have a longer manuscript section for publication later this week.The Bank of Japan threw in the towel on negative interest rates last week. Yay, yen interest rates will go back to their low positive “normal.” This change is not that significant, other than on a psychological basis. I have not been following Japanese data closely, but my tendency is to expect glacial changes in economic conditions. T ..read more

I was recently on a podcast with Steven D. Grumbine to discuss inflation. Link: https://realprogressives.org/podcast_episode/episode-268-there-is-no-magic-pricing-fairy-with-brian-romanchuk The podcast description from the webpage is. “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Milton Friedman This quote by the grandaddy of neoliberal economics is from 1963. Some in the mainstream have been dining out on it ever since. According to our guest, author and blogger ..read more

The Committee for Economic Development (CED) of Conference Board recently put out “Explainer: The National Debt” which is pretty much a greatest hits of debt scare mongering. Other than the references to recent events and data, it is timeless: the authors could have put out the same report in any year since the mid-1980s and not much of the contents would have changed. Anyone who thinks that the MMT debate would improve things just needs to read the report to see that progress in conventional economics is largely illusionary. The shtick of the “explainer” is that “the fiscal crisis is here ..read more

This article is an unedited draft section from my inflation primer manuscript. This section is a re-write of content that I saw as having issues. This re-write has led me to be happier with the first chapter, which I had long seen as having problems. Given the importance of the free preview in online book sales, the first chapter has to be solid. One fundamental problem with the consumer price index is that it is the result of what most people would consider a complex calculation. This should not be surprising, since they are tasked with converting the price change of large number of items ..read more

One of the issues of an interest rate focussed blog is that bond markets can settle into rather uneventful extended range trading dynamics. This has been the case for U.S. inflation-linked bonds, at least from a strategic perspective. That is, given a target fixed income allocation (which depends upon preferences and situation of the investors involved), should we hold inflation-linked or conventional government bonds? (The general tendency is to overweight bonds that incorporate credit or prepayment risk, making the allocation decision slightly more complicated. This is because there are n ..read more