[SueDeNîmes]

It'd help if people could cite actual MMT literature, video etc. Too much seems to be based on second-hand misrepresentation.

[SueDeNîmes]

Indeed, shifts in aggregate demand affect prices but the multiplier alone doesn't give you enough information about the slope of the aggregate supply curve.

Do you mean, for example, a public spending cut might reduce aggregate supply more than aggregate demand and thus be inflationary?

In practice, it's way more useful to monitor inflation expectations because prices will often be determined by contracts, and these will be signed by agents making assumptions about future inflation.

Well I'm skeptical about that but, if so, inflation expectations are a leading indicator of the multiplier for changes in public spending, which is fine.

[wat0n]

Do you mean, for example, a public spending cut might reduce aggregate supply more than aggregate demand and thus be inflationary?

No, I mean that the fiscal multiplier doesn't give us - on its own - all that much information about the slope of the aggregate supply curve.

Well I'm skeptical about that but, if so, inflation expectations are a leading indicator of the multiplier for changes in public spending, which is fine.

It's a leading indicator of future inflation. Just think about it: Would you negotiate a contract that makes you lose money after inflation?

[SueDeNîmes]

No, I mean that the fiscal multiplier doesn't give us - on its own - all that much information about the slope of the aggregate supply curve.

Then surely it gives sufficient information to determine that spending cuts will tend to be disinflationary?

It's a leading indicator of future inflation. Just think about it: Would you negotiate a contract that makes you lose money after inflation?

No but so what?

[wat0n]

Then surely it gives sufficient to information to determine that spending cuts will tend to be disinflationary?

No, for the same reason really.

The parameter you want would be something along a fiscal spending passthrough on inflation.

No but so what?

So it means you may actually want to keep those expectations subdued if you are the Fed. It's a more useful indicator because of how mechanically correlates with inflation, and it's observable in different ways (you can get explicit expectations from surveys, implicit ones from the spread in the nominal and inflation-adjusted treasury yields).

[SueDeNîmes]

No, for the same reason really.

The parameter you want would be something along a fiscal spending passthrough on inflation.

What does "a fiscal spending passthrough on inflation" mean?

So it means you may actually want to keep those expectations subdued if you are the Fed.

In which case spending cuts would subdue those expectations.

It's a more useful indicator because of how mechanically correlates with inflation, and it's observable in different ways (you can get explicit expectations from surveys, implicit ones from the spread in the nominal and inflation-adjusted treasury yields).

It might indeed be a more useful indicator, but not a confounder.

[wat0n]

What does "a fiscal spending passthrough on inflation" mean?

How much do prices change when fiscal spending is increased by 1%?

In which case spending cuts would subdue those expectations.

Not necessarily, not if people don't believe the cuts will be permanent for instance. Managing expectations is way harder than it seems.

[Steve_American]

People, those of you who are predicting inflation clearly don't grok MMT and why it says inflation is the constraint, but not that easy to start. Some points.
1] All your examples of inflation were not caused by excess deficit spending. I posted a link some time ago to a report by the Cato Institue of all the cases of hyperinflation. All of them were post 1900. All of them involved either a major shortage of something like food or debts in a foreign currency. Weimar was caused by the Versailes Treaty that required reparations to be paid in gold, or Pounds or Francs. Venesuala was caused by debts in dollars and a drop in oil prices which Venesuala exports. Zimbabwai was cauused by a huge drop in food prooduction caused by repacing the nation's farmers with ex-soldiers who didn't know sh*t about farming.
2] IMHO, the large but not hper inflation in the US in the 70s was caused by the US going off the gold standard in 1971. This all by itself cause high inflationary expectations because most people believed then just what the "inflation predicters now" believe, and there was not the experience that we have now to show that infation does NOT follow an incrase in the money supply.
. . . Some of those who didn't trust the US$ as a fiat currency were the leaders of OPEC and they raised the price of the oil they sold by over 100%. This then constituted a sort of shortage of oil, and this drove up the price of everything else.
3] Every one of you are ignoring MMT's claim that savings is a leakage of money out of the economy. Until you addrss this point, all lurkers need to be wary of your opinions.
. . . According to my MMT sources, MS econ. believes that savings fund bank loans. That therefore, they are recycled back into the economy and are not a leakage. So, therefore, the activities of banks can be factored out of the model and ignored. However, we all saw in 2007-8 that this is not so. That the activities of banks can't be ignored.
. . . I have posted here a link to the report about an experiment done in Germany in 2014 that proved that banks don't lend their depositors' money , that they create new money with every loan. So far, I'm not aware of even one of the 'inflation predictors' here who accepted this as the final word and corrected their thinking.
4] When the US Gov. sells a bond to 'fund' its deficit spending (and the Fed. doesn't buy it back) this all by itself forces the deficit spending to be saved. This is because nobody will buy a bond to just turn around and sell it. They buy bonds becase they want to hold them.
. . . OTOH, when the Fed. is buying bonds back, then the bond buyers do intend to sell them to the Fed. and make an instant profit.
. . . Note, that, in Japan the BoJ has been buying Japanese Gov. bonds for almost 30 years now and now holds over 45% of them. During this time bond yields have not increased, inflation has dropped, and Japan has not gone bankrupt. And, I'm sick and tired of hearing "well, not yet; buy soon Japan will massively suffer the consequences of all that deficit spending funded by the BoJ." The experiment has been done. The prediction in 1992 was within 5 years disaster would result; well, it is 6 times longer than 5 years and still no disaster. When will the mass of the people stop waiting with you and accept that your theory is just wrong? When will you here stop waiting and accept that the theory you were taught is just wrong? Why is 6 times longer not enough time?
. . . An analogy is; an alchemist gets paid by a king to make gold. He mixes sulfer and lead and claims that soon they will change into gold. How long should the king wait before he groks that the alchemist doen't know what he claimed he knew? How long *would* he wait? Thirty years?

How long will you, the lurkers, wait knowing that MMT says that the Gov. can and, in fact, needs to deficit spend a lot more to keep the economy healthy. And that the Fed. can buy many of the bonds sold without causiing inflation? How long will you wait? Are you as sick of hearing the predictions that never materialize as I am?

Sorry I can't spell and am lazy today.

[SueDeNîmes]

How much do prices change when fiscal spending is increased by 1%?

Depends how much slack there is in the economy (among other things). I'm none the wiser about "a fiscal spending passthrough on inflation"..

Not necessarily, not if people don't believe the cuts will be permanent for instance.

Which you might expect if govt routinely causes high inflation by spending. But no one's suggesting anything of the kind.

Managing expectations is way harder than it seems.

And it's not even clear what difference they make : https://www.investorschronicle.co.uk/ch ... ectations/

[wat0n]

Depends how much slack there is in the economy (among other things). I'm none the wiser about "a fiscal spending passthrough on inflation"..

Indeed, it depends on many other factors too.

Which you might expect if govt routinely causes high inflation by spending. But no one's suggesting anything of the kind.

It depends on how fiscal policy is usually conducted. Latin American countries work differently from how the US does.

And it's not even clear what difference they make : https://www.investorschronicle.co.uk/ch ... ectations/

Would you cite from it? It has a paywall.

[SueDeNîmes]

Indeed, it depends on many other factors too.


It depends on how fiscal policy is usually conducted. Latin American countries work differently from how the US does.

They conduct fiscal policy with interesting rhythms.

Would you cite from it? It has a paywall.

As long as no one pretends it's saying inflation doesn't matter:

Irrelevant expectations
In theory, high inflation expectations are a problem. In reality, not so much.

Next week, the Bank of England will publish its latest survey of the public’s inflation expectations. This could show that people expect above-target inflation simply because inflation has been high recently. In theory, this points to inflation staying high. This is because ever since Milton Friedman’s famous lecture to the American Economic Association in 1968, economists have believed that inflation expectations help determine actual inflation. As Kevin Hoover explained: “As workers come to anticipate higher rates of price inflation, they supply less labour and insist on increases in wages that keep up with inflation.”

But is this true? The Bank of England’s survey of inflation expectations has been going since 1999, so we can use it to test this claim. If it’s correct, we’d expect to see a positive correlation between inflation expectations and wage growth in the following 12 months. So do we?

No. Quite the opposite. Since the Bank’s survey began there has actually been a strong negative correlation (of 0.59) between households’ inflation expectations and subsequent wage growth. Low inflation expectations in the early 2000s led to high wage growth, but high inflation expectations in 2008 and 2011 led to low wage growth. This negative correlation exists even if we control for other determinants of wage growth such as unemployment or productivity growth – although it becomes statistically insignificant if we control for both of these. What we have is not so much an expectations-augmented Phillips curve as an expectations-diminished one.

[wat0n]

What's the correlation between expected and realized inflation?

[SueDeNîmes]

I don't know. What about it?

[wat0n]

It seems expectations are a decent predictor of actual inflation:

https://www.federalreserve.gov/monetary ... memo05.pdf
https://www.bls.gov/opub/mlr/2019/artic ... lities.htm

[SueDeNîmes]

And..?

[wat0n]

And, it means it's worthwhile for policymakers to follow it?

[SueDeNîmes]

Is someone saying otherwise?

[wat0n]

Well, what I'm getting at is that it's better to follow that than the fiscal multiplier. Mostly because inflation expectations are easier to observe and don't rely on trying to estimate multipliers or aggregate supply slopes.

If you agree, then welcome to mainstream economics. That's how central banking works nowadays.

[SueDeNîmes]

"Better"..? Is there some contradiction?

[Steve_American]

Sorry for the long delay in replying to this exchange.

Why not wait until you see actual high infltion?
. . . This better than any predictor, because there is a 100% correlation between actual high inflation and high inflation. This has to be be better than even an 80% correlation.
. . . What evidence is there that it is hard or impossible to stop inflation after it starts? Not according to some theory, evidence from the real world.

This is what the Fed. had decided to do late last year.

Also, it has been 3 months since May. So, far there is no high inflation. Yes, some in some sectors, like used cars, but IIRC that has slowed down now.

MMTer, Prof. Bill Mitchell, asserts that his study of the question shows us that monetary policy has very little effect on infltion. That it neither increses it nor slows it down. That is, the correlation in the 2 data set is low. MMTers want the Gov. and or Fed. to use fiscal (tax changes and/or spending changes) to regulate the economy.

I just thought of a way that the US Gov. could rapidly change its spending. It could have a UBI that is paid monthly to *everyone*. But it varies. The Gov. has many PSA to explain that one can't count on the UBI payment until it is in the bank, because it varies.
. . . This UBI changes the income of everyone based on what the Gov. thinks is too much inflation. Maybe the Fed. could be given the job of making the decision each month. Certainly, not Congress. Maybe the Pres. could increase or decrease the amount the Fed. decided on by no more than 10%, except not in the 6 mo. leading up to the general election.
. . . This UBI could be given to every citizen or even legal resident. This would be additional money to reduce child poverty. Because the idea is to have a fast way to increase or decrease incomes in the economy, it is not welfare. If the 'market' is so wonderful, it follows that it can adapt to this new reality.
. . . The yearly total amount can't be tiny, because it needs room on the down-side to work. The yearly total can't be too much either.
. . . This is better than changing the interest rate, because it works by changing incomes directly, not indirectly. It is better because it takes effect immediately. It is better for increasing inflation because there is no limit on the up-side.** It can be augmented on the down-side after the payment has reached zero, by other monetary, and then, fiscal changes (like increasing the withholding amount by some percentage or having a surtax percentage that can be easily increased).

. ** . This may seem strange, however for many years now (2 or 3 decades?), the problem has been too little inflation, not too much.
.