An other-paradigm bludgeon?

>   (email exchange)
>   On Fri, Apr 29, 2011 at 10:10 AM, Arthur Patten wrote:
>   Warren, just came across this 2008 paper. Authors find that most of the volatility in
>   standard inflation measures is due to relative price changes and that interest rates
>   are positively correlated with inflation. On behalf of the authors, you’re welcome!


By Ricardo Reis and Mark W. Watson

August 2008

Department of Economics, Columbia University
Department of Economics and Woodrow Wilson School, Princeton University

Abstract (excerpts below): This paper uses a dynamic factor model for the quarterly changes in consumption goods’ prices to separate them into three independent components: idiosyncratic relative-price changes, a low-dimensional index of aggregate relative-price changes, and an index of equiproportional changes in all inflation rates, that we label “pure” inflation. The paper estimates the model on U.S. data since 1959, and it presents a simple structural model that relates the three components of price changes to fundamental economic shocks. We use the estimates of the pure inflation and aggregate relative-price components to answer two questions. First, what share of the variability of inflation is associated with each component, and how are they related to conventional measures of monetary policy and relative-price shocks? We find that pure inflation accounts for 15-20% of the variability in inflation while our aggregate relative-price index accounts most of the rest. Conventional measures of relative prices are strongly but far from perfectly correlated with our relative-price index; pure inflation is only weakly correlated with money growth rates, but more strongly correlated with nominal interest rates. Second, what drives the Phillips correlation between inflation and measures of real activity? We find that the Phillips correlation essentially disappears once we control for goods’ relative-price changes.

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6 Responses to An other-paradigm bludgeon?

  1. Mario says:

    hey all,

    so I’ve been commenting on a blog post that talks about the idea of unifying Austrians and MMT’ers.

    I frankly agree with the author and feel that Austrian econ and MMT econ do need to combine…I actually suspect that Warren feels the same way…especially considering he’s a Libertarian at heart and I believe he’s alluded to that in a comment or two. Is that true Warren?

    Anyway this one person named Ellen asked this question over there and I answered her as best I could but figured I’d grab some of you guys to head over and talk to her too in case I misspoke and/or there’s more to add.

    Here’s her question and so head over there!! I do think if the unification of Austrians and MMT’ers would be more than a huge step in the right direction.

    Here’s the link to the blog and here’s her question:

    “Question for MMTers —

    Without government debt out there to give the Fed’s trading desk something to buy and sell (that is, OMOs), how would the Fed conduct monetary policy?”



    just offer fed funds at 0 to any bank in any quantity and wake up to the fact that the liability side of banking is not the place for market discipline.

    see my proposals on this website


  2. Jason says:

    Volcker fought inflation with high interest rates. Doesn’t mean high rates caused inflation. Correlation doesn’t equal causation….



    it’s my story and i’m sticking to it…

    yes, not proof, just deduction on my part that Volcker’s high interest rate policy supported and prolonged the inflation, as previously discussed.


    Calgacus Reply:

    And A. H. Gibson’s & Keynes’s & Geoffrey Gardiner’s story, to add other luminaries’ support.

    Raising interest rates against inflation seems to me to be a lot like yo-yo dieting, or bulimorexia. Might lose weight for a little while, but in the long run it makes you much fatter and damages your health. Functional finance & MMT-approved policies like low interest rates are like healthy, scientific body-building following Dr. Mosler’s exercise video.


    Mario Reply:

    What prevents another bubble creation though with zero rates? And what about savers in such a scenario?

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