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Ricardo Reis Profile picture
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Aug 1 • 6 tweets • 3 min read
** Is it my fault that my head is wet? 🌧️

A strong recovery, fiscal stimulus, supply bottlenecks, Russia's invasion, energy crisis. Surely they are the causes for why inflation is high? Therefore, it is not the central banks’ fault!

Yes but no 🧵
If it suddenly starts raining, and my head gets soaking wet, it was the rain that caused it. Not my fault?

Well, it turns out I had an umbrella ☔️. I chose not to open it. Even if I did it for good reasons, and even if the umbrella wasn't perfect, it is my fault I got so wet.
Lots of shocks hit the economy all the time. Inflation targeting is all about using monetary policy to offset them. That is imperfect, so even the best/luckiest CBs will end up with 1-3%, or argue 5% one-off is best. But 7-9% for more than a year is (almost always) their fault.
The regime of CB independence rests on principle that monetary policy can hit the inflation target. Lots of debate in academia on whether (or when) this is right; maybe success of last 25 years was a fluke. But for central bankers this is a raison d'être
personal.lse.ac.uk/reisr/papers/9…
I made this umbrella analogy in this fun podcast discussion with @zingales and @bethanymac12 at #Capitalisnt in the @StiglerCenter. Thank you for having me.

PS: There are huge, and very intellectually rewarding, literatures on causality, counterfactuals, and the role of policy, spanning philosophy, statistics, and economics (and more). I would not know where to start with a recommendation, but others here might.

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More from @R2Rsquared

Ricardo Reis Profile picture
Jul 30
** The burst of high inflation in 2021-22: How and Why?

I just released a paper based on several talks I’ve given over many months (starting with Markus Academy @markuseconomist and ending with @BIS_org) on why monetary policy did not stop inflation rising in 2021-22 🧵
The focus is on advanced economies and the examples come from the @federalreserve and the @ecb. I highlight 🔢 factors, which I think were central. They are not exclusive, and I hope are broad enough to include other views in the public debate, with different weights on each one
1⃣ A misdiagnoses of shocks in 2021-22
i) Not tightening in 21H1 when recovery (stimulus) was strong
ii) Interpreting 21H2 supply shocks as markup shocks rather than falls in potential output
iii) “Seeing through” rise in energy prices of 22Q1 when expectations were not anchored
Read 8 tweets
Ricardo Reis Profile picture
Jul 27
** Blaming the ECB for an Italian debt crisis?

As the ECB (finally!) raised rates to curb inflation it announced a new bond-buying program. If that fails and an Italian debt crisis follows, is the ECB to blame? Some rough back-of-the-envelope numbers on 🇮🇹 debt fundamentals… 🧵
🇮🇹’s government debt is rougly 150% of GDP. But only about 1/3 of that is due in the next 2 years. Say the ECB raises rates by 3-6% on average over 2 years to fight inflation. Then this costs 3-6% x 50% = 1.5-3% to the 🇮🇹 Treasury. 🧵
But don't forget: the ECB, by not raising rates so far, allowed inflation to rise. In 2021-23, the 🇮🇹 GDP deflator is going to be higher by 4-8% than its creditors expected when they lent to it. With debt of 150%, that is a debasement of debt by 6-12% of GDP. 🧵
Read 10 tweets
Ricardo Reis Profile picture
Mar 4
*** For Europe, more is at stake today

One week of economic sanctions is not enough to assess their full impact. But it has been enough time to see they are not enough to stop the war. The next step is clear: European countries should stop buying Russian oil and gas on Monday🧵
Two years ago, governments ordered us to lockdown at home. It was worth it, to fight the virus, and to defend public health.
To fight the virus of totalitarianism and defend freedom it is worth it to lock-down *all* Russian exports to global markets. More is at stake today
The fall in GDP from stopping any Russian exports in 22Q2 will surely be much lower than the impact that the public health measures had in 20Q2. And, as brave Ukrainians show us every day, some values are worth more than material well being. More is at stake today.
Read 9 tweets
Ricardo Reis Profile picture
Feb 1
One part of the Fed’s announcement last week had me scratching my head. 🧵

It “unanimously reaffirmed its Statement on Longer-Run Goals and Monetary Policy Strategy. The reaffirmed statement is identical to the version initially adopted in August 2020.”

federalreserve.gov/newsevents/pre…
That 08/20 statement set out flexible average inflation targeting, where the Fed will seek inflation that averages 2% as measured by the PCE deflator over an unspecified horizon

federalreserve.gov/monetarypolicy…
The Fed explains this strategy as meaning: “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” Surely it is symmetric

federalreserve.gov/faqs/economy_1…
Read 8 tweets
Ricardo Reis Profile picture
Jan 21
*** We are all doves now 🧵

Most hawkish speak from the most dovish Fed (in speak and actions) puts you where?

To get a sense of how dovish the FOMC today is, focus on the longest serving member: Charlie Evans, president of the Chicago Fed. Here is what he said in October 2011:
"Imagine that inflation was running at 5% against our inflation objective of 2%. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire."
Evans was then seen as the most dovish FOMC member because he thought that: "the Fed should commit to keeping short-term rates at zero "until either the unemployment rate goes below 7% or the outlook for inflation over the medium term goes above 3%."
washingtonpost.com/blogs/ezra-kle…
Read 7 tweets
Ricardo Reis Profile picture
Nov 14, 2021
** The “macro” view on 2021 inflation
Since March 21, I've given many public lectures on inflation. All of them included the slide below (most recently at the Jahnsson prize lecture)
Tldr: every macro theory of inflation correctly predicted the high inflation that we have seen🧵
The 1st theory (Phillips, Keynesian) sees inflation as following from the closing of gaps in labor and product markets. Given how quickly the economy was rebounding already at the start of the year (and partly due to fiscal stimulus), inflation was expected to rise in 2021.
The 2nd theory (Wicksellian) sees inflation as resulting from interest rates being too low relative to a “neutral” benchmark. With CBs committing to keep interest rates at minima until 2022 and beyond, most rules (including Taylor's famous one) would put it below that benchmark.
Read 13 tweets

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