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Author: John H. Cochrane
Publisher: Princeton University Press
ISBN: 0691243247
Category : Business & Economics
Languages : en
Pages : 585
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Book Description
A comprehensive account of how government deficits and debt drive inflation Where do inflation and deflation ultimately come from? The fiscal theory of the price level offers a simple answer: Prices adjust so that the real value of government debt equals the present value of taxes less spending. Inflation breaks out when people don’t expect the government to fully repay its debts. The fiscal theory is well suited to today’s economy: Financial innovation undermines money demand, and central banks don’t control the money supply or aggressively change interest rates, invalidating classic theories, while large debts and deficits threaten inflation and constrain monetary policy. This book presents a comprehensive account of this important theory from one of its leading developers and advocates. John Cochrane aims to make fiscal theory useful as a conceptual framework and modeling tool, and for analyzing history and policy. He merges fiscal theory with standard models in which central banks set interest rates, giving a novel account of monetary policy. He generalizes the theory to explain data and make realistic predictions. For example, inflation decreases in recessions despite deficits because discount rates fall, raising the value of debt; specifying that governments promise to partially repay debt avoids classic puzzles and allows the theory to apply at all times, not just during periods of high inflation. Cochrane offers an extensive rethinking of monetary doctrines and institutions through the eyes of fiscal theory, and analyzes the era of zero interest rates and post-pandemic inflation. Filled with research by Cochrane and others, The Fiscal Theory of the Price Level offers important new insights about fiscal and monetary policy.
Author: John H. Cochrane
Publisher: Princeton University Press
ISBN: 0691243247
Category : Business & Economics
Languages : en
Pages : 585
Get Book Here
Book Description
A comprehensive account of how government deficits and debt drive inflation Where do inflation and deflation ultimately come from? The fiscal theory of the price level offers a simple answer: Prices adjust so that the real value of government debt equals the present value of taxes less spending. Inflation breaks out when people don’t expect the government to fully repay its debts. The fiscal theory is well suited to today’s economy: Financial innovation undermines money demand, and central banks don’t control the money supply or aggressively change interest rates, invalidating classic theories, while large debts and deficits threaten inflation and constrain monetary policy. This book presents a comprehensive account of this important theory from one of its leading developers and advocates. John Cochrane aims to make fiscal theory useful as a conceptual framework and modeling tool, and for analyzing history and policy. He merges fiscal theory with standard models in which central banks set interest rates, giving a novel account of monetary policy. He generalizes the theory to explain data and make realistic predictions. For example, inflation decreases in recessions despite deficits because discount rates fall, raising the value of debt; specifying that governments promise to partially repay debt avoids classic puzzles and allows the theory to apply at all times, not just during periods of high inflation. Cochrane offers an extensive rethinking of monetary doctrines and institutions through the eyes of fiscal theory, and analyzes the era of zero interest rates and post-pandemic inflation. Filled with research by Cochrane and others, The Fiscal Theory of the Price Level offers important new insights about fiscal and monetary policy.
Author: Willem H. Buiter
Publisher:
ISBN:
Category : Budget
Languages : en
Pages : 84
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Book Description
It is not common for an entire scholarly literature to be based on a fallacy, that is, 'on faulty reasoning; misleading or unsound argument'. The 'fiscal theory of the price level', recently re-developed by Woodford, Cochrane, Sims and others, is an example of a fatally flawed research programme. The source of the fallacy is an economic misspecification. The proponents of the fiscal theory of the price level do not accept the fundamental proposition that the government's intertemporal budget constraint is a constraint on the government's instruments that must be satisfied for all admissible values of the economy-wide endogenous variables. Instead they require it to be satisfied only in equilibrium. This economic misspecification has implications for the mathematical or logical properties of the equilibria supported by models purporting to demonstrate the properties of the fiscal approach. These include: overdetermined (internally inconsistent) equilibria; anomalies like the apparent ability to price things that do not exist; the need for arbitrary restrictions on the exogenous and predetermined variables in the government's budget constraint; and anomalous behaviour of the equilibrium' price sequences, including behaviour that will ultimately violate physical resource constraints. The issue is of more than academic interest. Policy conclusions could be drawn from the fiscal theory of the price level that would be harmful if they influenced the actual behaviour of the fiscal and monetary authorities. The fiscal theory of the price level implies that a government could exogenously fix its real spending, revenue and seigniorage plans, and that the general price level would adjust the real value of its contractual nominal debt obligations so as to ensure government solvency. When reality dawns, the result could be painful fiscal tightening, government default, or unplanned recourse to the inflation tax.
Author: Brigitte Granville
Publisher: Princeton University Press
ISBN: 0691145407
Category : Business & Economics
Languages : en
Pages : 290
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Book Description
Why we need to heed the lessons of high inflation Today's global economy, with most developed nations experiencing very low inflation, seems a world apart from the "Great Inflation" that spanned the late 1960s to early 1980s. Yet, in this book, Brigitte Granville makes the case that monetary economists and policymakers need to keep the lessons learned during that period very much in mind, lest we return to them by making the same mistakes we made in the past. Granville details the advances in macroeconomic thinking that gave rise to the "Great Moderation"—a period of stable inflation and economic growth, which lasted from the mid-1980s through the most recent financial crisis. She makes the case that the central banks' management of monetary policy—hinging on expectations and credibility—brought about this period of stability, and traces the roots of this success back to the eighteenth-century foundations of modern monetary thought. Tackling fundamental questions such as the causes of inflation and its relation to unemployment and growth, the natural rate of inflation hypothesis, the fiscal theory of the price level, and the proper goals of central banks, the book aims above all to demonstrate the dangers of forgetting the role of credibility in establishing sound monetary policy. With the lessons of the past firmly in mind, Granville presents stimulating ideas and proposals about inflation-targeting principles, which provide tools for present-day monetary authorities dealing with the forces of globalization, mercantilism, and reserve accumulation.
Author: Willem Buiter
Publisher: Cambridge University Press
ISBN: 1108842828
Category : Business & Economics
Languages : en
Pages : 229
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Book Description
It is well known that the balance sheets of most major central banks significantly expanded in the aftermath of the financial crisis of 2007-2011, but the consequences of this expansion are not well understood. This book develops a unified framework to explain how and why central bank balance sheets have expanded and what this shift means for fiscal and monetary policy. Buiter addresses a number of key issues in monetary economics and public finance, including how helicopter money works, when modern monetary theory makes sense, why the Eurosystem has a potentially fatal design flaw, why the fiscal theory of the price level is a fallacy and how to escape from the zero lower bound.
Author: John B. Taylor
Publisher: University of Chicago Press
ISBN: 0226791262
Category : Business & Economics
Languages : en
Pages : 460
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Book Description
This timely volume presents the latest thinking on the monetary policy rules and seeks to determine just what types of rules and policy guidelines function best. A unique cooperative research effort that allowed contributors to evaluate different policy rules using their own specific approaches, this collection presents their striking findings on the potential response of interest rates to an array of variables, including alterations in the rates of inflation, unemployment, and exchange. Monetary Policy Rules illustrates that simple policy rules are more robust and more efficient than complex rules with multiple variables. A state-of-the-art appraisal of the fundamental issues facing the Federal Reserve Board and other central banks, Monetary Policy Rules is essential reading for economic analysts and policymakers alike.
Author: John H. Cochrane
Publisher: Princeton University Press
ISBN: 1400829135
Category : Business & Economics
Languages : en
Pages : 552
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Book Description
Winner of the prestigious Paul A. Samuelson Award for scholarly writing on lifelong financial security, John Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Cochrane traces the pricing of all assets back to a single idea—price equals expected discounted payoff—that captures the macro-economic risks underlying each security's value. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Each model—consumption based, CAPM, multifactor, term structure, and option pricing—is derived as a different specification of the discounted factor. The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas. Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross section, and equity premium puzzles and their resolution. Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics.
Author: Jean-Pascal Bénassy
Publisher: MIT Press
ISBN: 0262026139
Category : Equilibrium (Economics)
Languages : en
Pages : 215
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Book Description
An important recent advance in macroeconomics is the development of dynamic stochastic general equilibrium (DSGE) macromodels. The use of DSGE models to study monetary policy, however, has led to paradoxical and puzzling results on a number of central monetary issues including price determinacy and liquidity effects. In Money, Interest, and Policy, Jean-Pascal Benassy argues that moving from the standard DSGE models - which he calls "Ricardian" because they have the famous "Ricardian equivalence" property-to another, "non-Ricardian" model would resolve many of these issues. A Ricardian model represents a household as a homogeneous family of infinitely lived individuals, and Benassy demonstrates that a single modification-the assumption that new agents are born over time (which makes the model non-Ricardian)-can bridge the current gap between monetary intuitions and facts, on one hand, and rigorous modeling, on the other. After comparing Ricardian and non-Ricardian models, Benassy introduces a model that synthesizes the two approaches, incorporating both infinite lives and the birth of new agents. Using this model, he considers a number of issues in monetary policy, including liquidity effects, interest rate rules and price determinacy, global determinacy, the Taylor principle, and the fiscal theory of the price level. Finally, using a simple overlapping generations model, he analyzes optimal monetary and fiscal policies, with a special emphasis on optimal interest rate rules
Author: Stephanie Kelton
Publisher: PublicAffairs
ISBN: 1541736206
Category : Business & Economics
Languages : en
Pages : 311
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Book Description
A New York Times Bestseller The leading thinker and most visible public advocate of modern monetary theory -- the freshest and most important idea about economics in decades -- delivers a radically different, bold, new understanding for how to build a just and prosperous society. Stephanie Kelton's brilliant exploration of modern monetary theory (MMT) dramatically changes our understanding of how we can best deal with crucial issues ranging from poverty and inequality to creating jobs, expanding health care coverage, climate change, and building resilient infrastructure. Any ambitious proposal, however, inevitably runs into the buzz saw of how to find the money to pay for it, rooted in myths about deficits that are hobbling us as a country. Kelton busts through the myths that prevent us from taking action: that the federal government should budget like a household, that deficits will harm the next generation, crowd out private investment, and undermine long-term growth, and that entitlements are propelling us toward a grave fiscal crisis. MMT, as Kelton shows, shifts the terrain from narrow budgetary questions to one of broader economic and social benefits. With its important new ways of understanding money, taxes, and the critical role of deficit spending, MMT redefines how to responsibly use our resources so that we can maximize our potential as a society. MMT gives us the power to imagine a new politics and a new economy and move from a narrative of scarcity to one of opportunity.
Author: Robert E. Lucas, Jr.
Publisher: Harvard University Press
ISBN: 0674067851
Category : Business & Economics
Languages : en
Pages : 569
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Book Description
One of the outstanding monetary theorists of the past 100 years, Lucas revolutionized our understanding of how money interacts with the real economy of production, consumption, and exchange. These 21 papers, published 1972–2007, cover core monetary theory and public finance, asset pricing, and the real effects of monetary instability.
Author: Thomas S. Coleman
Publisher: CFA Institute Research Foundation
ISBN: 1952927234
Category : Business & Economics
Languages : en
Pages : 65
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Book Description
The fiscal theory of the price level (FTPL) provides an update and revision of monetary theory to address puzzles raised by the failure of both the new Keynesian theory (commonly used by central bankers) and neoclassical monetarism (in particular, the quantity theory of money as interpreted by Milton Friedman and Anna Schwartz)—puzzles such as the low inflation that followed the sustained expansionary monetary policies post-2008. We aim to summarize and explain the FTPL as developed by Eric Leeper, John Cochrane, and others. The FTPL builds on neoclassical monetarism by observing that government liabilities—bonds, notes, bills, and currency—derive their value from the assets that back these liabilities. These assets are chiefly the present value of future tax revenues, minus government spending other than that part of spending used to service the liabilities themselves. This net “profit” of the government is called the primary surplus. This primary surplus can be expressed in real terms (a quantity of goods and services, rather than a money amount). The total real value of the bonds is thus the total real value of the assets backing the bonds: the present value of all future real primary surpluses (which we shorten to PVFS, present value of future surpluses). In a very important sense, the FTPL harkens back to commodity-based theories of money, except now the “commodity” is the real value of future surpluses earned by the government. We can then solve for the price level. It is simply the nominal value of the bonds (the face value or number of bonds issued) divided by the real value of the bonds (the PVFS). If the nominal value of the bonds is held constant and the underlying asset (PVFS) becomes less valuable, prices go up. If the PVFS becomes more valuable, prices go down. We thus calculate the value of “money” (including government liabilities of all maturities) the way one would calculate the value of any security: through discounted cash flow analysis. Note that this approach is consistent with the QTM because, if money is defined in the traditional way as currency and demand deposits and we now hold the PVFS (the backing of the money) constant, then the price level is proportional to the amount of money in circulation. The FTPL is a more complete theory, however, because (1) it incorporates all government liabilities, not traditional money alone, and (2) because it is forward-looking and dynamic rather than considering only conditions in the present.
