The G.6 release fell to President Bill Clinton’s “Paperwork Reduction Act of 1995”: From the Federal Register:
“The usefulness of the FR 2573 data in understanding the behavior of the monetary aggregates has diminished in recent years as the distinction between transaction accounts and savings accounts has become increasingly blurred (And that’s also what Chairman Alan Greenspan said about M1). But Vt would have stuck out like a sore thumb with the boom in real-estate.
Further, the emphasis on monetary aggregates as policy targets has decreased. In addition, respondent participation has declined over the last several years. For these reasons, the Federal Reserve proposes to discontinue the survey and the related statistical release.”
That was exactly why the G.6 Debit and Demand Deposit Turnover statistical release should not have been discontinued by Ed Fry (then the BOG’s longest running time series).
Vi is a “residual calculation - not a real physical observable and measurable statistic.” Income velocity may be a "fudge factor," but the transactions velocity of circulation is a tangible figure.
I.e., income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M) whereas Vt, the transactions’ velocity of circulation, is an “independent” exogenous force acting on prices.
Money demand is viewed as a function of its opportunity cost-the foregone interest income of holding lower-yielding money balances (a liquidity preference curve). As this cost of holding money falls, the demand for money rises (and velocity decreases).
As Dr. Philip George says: “The velocity of money is a function of interest rates”
As Dr. Philip George puts it: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”
American Yale Professor Irving Fisher's "equation of exchange" is a transaction's concept, not an income concept. Rent converges to house prices, house prices don't converge to rent prices.
Isn't the core of the fiscal theory that central banks will fail to properly adjust monetary policy in the presence of large deficits that need to be funded? In that case there is no tension between the models.
IMHO, this is the best review of US inflation out there, and there is a lot out there.
The Fed needs to lay low for a while. While I prefer NGDP targeting, if the Fed is going to target inflation, maybe 2% to 3% is a reasonable goal, ala the Reserve Bank of Australia.
The Reserve Bank of India targets 4% inflation, btw.
The most important goal is prosperity.
I would like to see a post on whether the Fed should shrink its balance sheet. The Bank of Japan is not.
Given globalized capital markets...I wonder if shrinking the Fed's balance sheet will do anything to domestic inflation, but will re-leverage US taxpayers.
"If the American Rescue Act was responsible for inflation taking off (because “it became clear the Administration was not going back to standard fiscal policy”), what made inflation peak and began to fall in March 2022 if perceptions of fiscal policy have not changed?"
The Fiscal Theory relies on the equilibrium condition that the real value of government debt is equal to expected future surpluses. A rise in nominal debt, given no change in expected future surpluses, requires the price level to adjust to bring back equilibrium.
The Fiscal Theory's model predicts that a one time helicopter drop would only lead to temporary inflation, as we experienced. This is because inflation reduces the real value of government debt, and "inflating the debt away" can reduce expected deficits, as the debt burden/costs is lower.
I think the fiscal theory and Divisia M4 both can explain inflation not falling further. Rate hikes have led to higher interest payments, which have not been financed by taxes, but rather more debt. Hence the Fiscal Theory model predicts that rate hikes temporarily reduce inflation, but raise it to an asymptote in the long run. I think this is one of the reasons Divisia M4 is also a good measure, its inclusion of treasuries.
The G.6 release fell to President Bill Clinton’s “Paperwork Reduction Act of 1995”: From the Federal Register:
“The usefulness of the FR 2573 data in understanding the behavior of the monetary aggregates has diminished in recent years as the distinction between transaction accounts and savings accounts has become increasingly blurred (And that’s also what Chairman Alan Greenspan said about M1). But Vt would have stuck out like a sore thumb with the boom in real-estate.
Further, the emphasis on monetary aggregates as policy targets has decreased. In addition, respondent participation has declined over the last several years. For these reasons, the Federal Reserve proposes to discontinue the survey and the related statistical release.”
That was exactly why the G.6 Debit and Demand Deposit Turnover statistical release should not have been discontinued by Ed Fry (then the BOG’s longest running time series).
Vi is a “residual calculation - not a real physical observable and measurable statistic.” Income velocity may be a "fudge factor," but the transactions velocity of circulation is a tangible figure.
I.e., income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M) whereas Vt, the transactions’ velocity of circulation, is an “independent” exogenous force acting on prices.
Money demand is viewed as a function of its opportunity cost-the foregone interest income of holding lower-yielding money balances (a liquidity preference curve). As this cost of holding money falls, the demand for money rises (and velocity decreases).
As Dr. Philip George says: “The velocity of money is a function of interest rates”
As Dr. Philip George puts it: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”
The track of inflation has been textbook. There have been no surprises.
American Yale Professor Irving Fisher's "equation of exchange" is a transaction's concept, not an income concept. Rent converges to house prices, house prices don't converge to rent prices.
Isn't the core of the fiscal theory that central banks will fail to properly adjust monetary policy in the presence of large deficits that need to be funded? In that case there is no tension between the models.
IMHO, this is the best review of US inflation out there, and there is a lot out there.
The Fed needs to lay low for a while. While I prefer NGDP targeting, if the Fed is going to target inflation, maybe 2% to 3% is a reasonable goal, ala the Reserve Bank of Australia.
The Reserve Bank of India targets 4% inflation, btw.
The most important goal is prosperity.
I would like to see a post on whether the Fed should shrink its balance sheet. The Bank of Japan is not.
Given globalized capital markets...I wonder if shrinking the Fed's balance sheet will do anything to domestic inflation, but will re-leverage US taxpayers.
"If the American Rescue Act was responsible for inflation taking off (because “it became clear the Administration was not going back to standard fiscal policy”), what made inflation peak and began to fall in March 2022 if perceptions of fiscal policy have not changed?"
The Fiscal Theory relies on the equilibrium condition that the real value of government debt is equal to expected future surpluses. A rise in nominal debt, given no change in expected future surpluses, requires the price level to adjust to bring back equilibrium.
The Fiscal Theory's model predicts that a one time helicopter drop would only lead to temporary inflation, as we experienced. This is because inflation reduces the real value of government debt, and "inflating the debt away" can reduce expected deficits, as the debt burden/costs is lower.
I think the fiscal theory and Divisia M4 both can explain inflation not falling further. Rate hikes have led to higher interest payments, which have not been financed by taxes, but rather more debt. Hence the Fiscal Theory model predicts that rate hikes temporarily reduce inflation, but raise it to an asymptote in the long run. I think this is one of the reasons Divisia M4 is also a good measure, its inclusion of treasuries.