raghu
Fri, 27 Aug 2010 15:38:08 -0700
On Fri, Aug 27, 2010 at 3:12 PM, Jim Devine <jdevin...@gmail.com> wrote: >> Long-run monetary neutrality is an uncontroversial, simple, but >> nonetheless profound proposition. In particular, it implies that if >> the FOMC maintains the fed funds rate at its current level of 0-25 >> basis points for too long, both anticipated and actual inflation have >> to become negative. Why? It’s simple arithmetic. Let’s say that the >> real rate of return on safe investments is 1 percent and we need to >> add an amount of anticipated inflation that will result in a fed funds >> rate of 0.25 percent. The only way to get that is to add a negative >> number—in this case, –0.75 percent. > > The problem with this fellow's analysis is that the current situation > belies the NC concept of the long run. That idea assumes that the > economy will attain something like full employment in the foreseeable > future.[...] When and if we attain that situation, we won't see a fed funds > rate equal > to about 0.25%. It would be more like 4%, in which case a 1% safe rate > would correspond to about 3% expected inflation (for loans of similar > maturity, i.e., overnight). I still don't see how to make sense of Kocherlakota's claim. Assume that the Fed for whatever reason holds rates down at 25 bp even at full employment. If "real returns" are larger than the interest rate, isn't that going to lead to *inflation* rather than deflation. It is not that this guys assumptions are flawed. It is worse than that. He is simply not making any sense. -raghu. _______________________________________________ pen-l mailing list pen-l@lists.csuchico.edu https://lists.csuchico.edu/mailman/listinfo/pen-l