Read on Twitter
@_SaMMF_
A great talk by @dandolfa today. I felt it merits summary:
a) The talk goes back to the idea by Sargent and Wallace that how money is pumped into the economy matters: directly financing deficits differs from purchases of assets that vary in liquidity premia.
A great talk by @dandolfa today. I felt it merits summary:
a) The talk goes back to the idea by Sargent and Wallace that how money is pumped into the economy matters: directly financing deficits differs from purchases of assets that vary in liquidity premia.
b) It turns the classic narrative of the Volcker disinflation around. Classic narrative is: Volcker was successful because he sold bonds to reduce the quantity of money in the economy. And that was painful because people didn't believe him.
c) David raises the important point, I think, that although the quantity of money was contracted, that operation raised rates. That why it was painful. More importantly, that reverse operations actually raised fiscal deficits, which would have lead to even more inflation.
d) The success story of Volker, was really the success of the control of deficits. He was getting it wrong actually.
One can work out an example actually from Ljungvist and Sargent.
One can work out an example actually from Ljungvist and Sargent.
e) The paper is very pertinent for today: According to Sargent and Wallace, the large increase in the Fed balance sheet, can reduce real rates on bonds and thus, lower the financial cost of deficits, even though the quantity of money has increased, at least temporarily.
side note: this is not vague MMT concept. It's actually a worked out example. It's a well studied concept called the unpleasant arithmetic which you can find in textbooks. David's nicely pieced the data and the model.
f) The most impressive part of the talk was when David told us of his amazing transition from laid-off construction worker toward doctorate degree.
Both the talk and the story, very stimulating!
Both the talk and the story, very stimulating!
