Earlier today I had an exchange with @StephanieKelton. She referred me to a paper. I read the paper and it makes my point and contradicts her claim.

There is a broader lesson here about whether MMT is an alternative positive theory or normative frame. Thread.
As a positive prediction, I would say that higher interest rates reduce output and lower output reduces inflation. You can debate the magnitudes but I would use those signs.

That is separate from the normative question of whether one should raise rates, target inflation, etc.
@StephanieKelton appeared to have the opposite positive prediction: "Have you considered the possibility that raising rates might move inflation higher?"

I said "No" and she cited a paper with a theoretical model and empirical estimates that *contradict* her positive statement.
Specifically, the model in the paper is relatively standard and it assumes that high/rising interest rates reduce output (equation 1, the rising term is the non-standard part) & lower output lowers inflation (equation 3).
The authors also show empirical vector autoregression (VAR) that are consistent with this model (although unfortunately they do not show the full set of results).
So much for the positive part.

Now let's get to policy. The modeling exercise does indeed find that assuming a certain model, certain parameters, and certain form of Fed policy, that inflation targeting will *create* excessive output volatility.
This is not an especially novel finding. It is a staple of research from Milton Friedman in the 1950s to a huge number of Fed papers to assume model different Fed reaction functions and assess their impact on inflation and output volatility.
This paper, in particular, only models a very particular form of inflation targeting that has little/no support anywhere, specifically the Fed sets the interest rate level based on solely on inflation (see equation 2).
The Fed's reaction function is better described as an inertial Taylor rule that both tries to avoid large changes in interest rates and also places weight on output gaps or unemployment.

I suspect the actual Fed policy would do better in this model than the strawman.
To summarize:

--The model has a relatively conventional *positive* prediction.

--It simulates & finds wanting a form of monetary policy no one supports.

--Our actual monetary policy would likely do well under the model.

--If not, some other anti-inflationary rule would.
As an addendum since this is where it all began: if we ever get to a world of 5% inflation and 2% unemployment I am going to be calling on the Fed to raise rates to lower inflation. I am not going to advocate middle class tax increases or spending cuts to control inflation.
Here is a jstor link to the published paper: jstor.org/stable/4538939

That appears to be gated, this is an earlier working paper version, don't know exactly how they differ:

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More from @jasonfurman

6 Apr
@AnnieLowrey's story on index funds misses clearly making two first order important points:

1. You should invest in them

2. Even with the growth of index funds we still devote too many resources, not too little, to price discovery in financial markets.

The merits of the "you should invest in them" advice is separable from the question of what would happen if everyone invested in them. Just like my recommendation that everyone should get their pizza from Armando's would not work if everyone actually took my recommendation.
This just doesn't scare me. Image
Read 7 tweets
31 Mar
Overall I quite like the American Jobs Plan. It is a serious proposal that would help increase economic growth, ensure growth was more fair, and raise additional revenue in a broadly reasonable manner.

Much that I would love to add, a bit I would subtract. A thread.
MACROECONOMIC/FISCAL. Given that interest rates are still too low & I'm worried about demand over the medium-term, $2T in *unpaid for* well-designed investments, some temporary, would be beneficial. As such I don't think this should all or even mostly be paid for.
As such, the decision about whether to keep the infrastructure proposals and corporate tax proposals together or to put them on different tracks should be more about legislative strategy than the perceived economic need to find offsets or pay for this particular bill.
Read 18 tweets
2 Mar
Many comments that I have enough followers that it was irresponsible to tweet this.

I disagree.

I was clear that J&J is "spectacular", it essentially eliminates death/hospitalization.

But I don't think the goals of good outcomes are served by elites perpetuating noble lies.
People can understand and process information and make good decisions for themselves and society. I'm not an expert and might even be wrong on J&J vs. Pfizer/Moderna, but when experts appear to be hiding the ball it is counterproductive.
Think back to the Surgeon General telling us not to use masks because they don't work and because health professionals needed them. Could tell this was illogical. And the damage reverberates to this day.
Read 5 tweets
2 Mar
If I had a choice btwn J&J & Moderna/Pfizer, I would take Moderna/Pfizer.

If I had a choice btwn J&J now and Moderna/Pfizer thirty minutes from now I would wait 30 minutes to take Moderna/Pfizer.

If the choice was J&J now vs. Moderna/Pfizer a year from now I would take J&J now.
What I don’t know is the T for which I’m indifferent between J&J now and Moderna/Pfizer in T days.

I’ve read a lot on the comparisons of efficacy being misleading & I’m sure that’s true. But it’s hard not to feel that much of the public health opinion has a thumb on the scale.
Yes, I know J&J is spectacular, essentially eliminates death and hospitalization and much better than flu vaccines.

But Moderna/Pfizer seem spectacularer, if I could get flu shots with higher efficacy I would take them.
Read 8 tweets
12 Feb
I've gotten questions about whether to emphasize U-6 as the "true unemployment rate". It is currently 11.1%.

I don't because I think the concept doesn't add much, it misses how unusually bad the labor market is now, is analytically flawed, and can be misleading.

The official unemployment rate is 6.3%. It is unemployed (people looking for work) divided by the labor force (working or looking for work).

U-6 is 11.1%, it adds in "marginally attached" (discouraged workers & would take a job if it came along) and involuntary part-time.
DOESN'T ADD MUCH. U-6 is one of several alternative unemployment concepts produced monthly by the BLS. They are all useful to look at. But they also all pretty much up and down together so they rarely tell much of a different story.
Read 9 tweets
11 Feb
The new @USCBO report confirms that we have substantial fiscal space, in fact more than we've generally had in the past. This is even true if the American Rescue Plan passes in full.

Critical to this is low interest rates mean low debt service.
CBO projects higher debt/GDP than it did pre-pandemic. But even this projection is not "spiraling" within the budget window but a relatively gradual increase.

More importantly, debt/GDP is a bad metric to look at as I've explained before.
CBO has lowered its interest rate forecast more than it raised its debt forecast. So real debt service as a share of GDP is lower than what we expected pre-crisis. This is even true with the American Rescue Plan (and assuming it raises interest rates).
Read 5 tweets

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