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David Andolfatto Profile picture
David Andolfatto
@dandolfa
Construction worker turned academic turned central banker turned academic again. Chair, Economics Department @MiamiHerbert University of Miami
3 subscribers
Mar 30 • 5 tweets • 1 min read
Let G(t) = govt spending at date t & M(t) = money supply at date t (assume govt is monopoly issuer). Money-financed spending means G(t) = M(t)-M(t-1).

Now, suppose P-level is related to M(t) so that inflation rate is related to M(t)-M(t-1). Suppose inflation is too high. How to reduce inflation w/o reducing G(t)? One way is to destroy money in hands of private sector through taxes T(t), so that

G(t) = T(t) + M(t) - M(t-1).

With taxes, govt can still fund G(t) while growing the money supply more slowly (lower inflation rate).
Aug 20, 2023 • 5 tweets • 1 min read
I think most--if not all--macroeconomists would agree that dramatic changes in CB interest rate policy can have real effects that influence the P-level. The idea that initiated the broader discussion, however, was that increasing the unemployment rate is *necessary* to bring inflation down (with an eye on our recent inflation experience). In my view, the answer is *no.*
Apr 5, 2023 • 15 tweets • 4 min read
Is full transparency always the best policy? Surprisingly, the answer can be a "no" in some circumstances. On the economics of opacity. 🧵 I became interested in this question after reading this article by Jack Hirschleifer (AER, 1971): people.duke.edu/~qc2/BA532/197…
The article contains the following example.
Mar 9, 2023 • 8 tweets • 2 min read
There's so much wrong-headed legacy-thinking here, I'm not sure where to start.

No exit ramp for Fed's Powell until he creates a recession, economist says cnb.cx/3SXHKYc First, I have no doubt that the Fed can bring inflation down *temporarily* by creating a recession. We saw this in 1981-82.

Second, there's a chance the Fed actually takes us there (though, 2nd-mandate considerations suggest less severe recession than Volcker-style).
Feb 23, 2023 • 12 tweets • 5 min read
If one takes seriously the notion of fiscal dominance-even as "temporary" regimes-fueled either from the supply side (as a gush of newly-issued UST debt in the C-19 era) or from the demand side (as in lowflation-ELB era), then might our monetary policy framework be all wrong? Under fiscal dominance, an increase in the policy rate may cause a temporary decline in inflation, but will eventually manifest itself as a higher rate of inflation (unpleasant monetarist arithmetic). Consider this: And also this:
Feb 11, 2023 • 13 tweets • 3 min read
Since 2008, the Fed has been permitted to pay interest on reserves. Prior to C-19, the Fed issued a lot of low-interest reserves to purchase a lot of high-interest securities. The positive spread on a large balance generated big profits, which were remitted to the Treasury... Image ...until recently. In 2022, the spread went negative: the interest paid on reserves exceeded the income generated by the Fed's portfolio of assets. As explained in the link below, the Fed covered this loss by "booking a deferred asset."

federalreserve.gov/newsevents/pre…
Jan 24, 2023 • 6 tweets • 2 min read
Imagine U.S. Treasury issues only one type of security: paper currency (as they once did). The interest rate on this currency is zero. Now, imagine a one-time "helicopter drop" of currency (say, during the 2020-21 pandemic). Will the resulting inflation be "transitory" or not? I say the rational forecast would have been to expect a transitory (i.e. mean-reverting) dynamic. Supply shocks along the way would have led to rational revisions in inflation forecasts (more persistent, but still transitory).
Jan 23, 2023 • 7 tweets • 2 min read
Money, debt, and inflation. A short 🧵@michaelsderby 2008-09 featured a large negative AD shock.
2020-21 featured a large negative AS shock.

In both cases, deficit-policies used to buffer.
In both cases, Fed + DIs "monetized" new debt.
Jan 12, 2023 • 7 tweets • 2 min read
While I've been on Team Transitory since Fall 2020 (yes, I warned of a "temporary" inflation back then), it's too early to take any victory laps. I continue to believe inflation will trend down slowly, but only conditional on no further shocks (fiscal/geopolitical, etc.) Of course, one should never not expect shocks. The shocks will come. When they do, they'll be (by definition) "surprises." The task of policymakers is to produce contingency plans--this is what "state-contingent policy" means. What are the big shocks we should be on guard for?
Jan 12, 2023 • 6 tweets • 2 min read
Is money "unprinted" when households buy T-bills?
I don't think so. Suppose Treasury sells a T-bill to a household. The household's bank accounted is debited and bank reserves flow into the TGA (the Treasury's bank account at the Fed). Perhaps this is what @MacroAlf means by "unprinting" money (reserves flow out of banking system).
Dec 14, 2022 • 20 tweets • 4 min read
Active vs. Passive Inflation Policy. Some thoughts on our inflation experience so far.🧵🤓 By "active," I mean "inflation induced by temporary transfers financed w/ deficits accommodated by central bank."

By "passive," I mean "inflation induced by adverse supply shocks."
Oct 27, 2022 • 4 tweets • 1 min read
Increase in supply of govt securities ("money") during AD shortfall (financial crisis) offsets deflationary forces (stabilizing inflation). Same increase during AS shortfall/full employment (Covid crisis) manifests as burst of inflation. Image This simple logic (which is too simple, but still contains a core element of truth) is what led me in fall 2020 to call for "temporary inflation." I did not make the same call in 2009 or throughout low inflation era.
Oct 11, 2022 • 10 tweets • 3 min read
Alright, so now I see what all the fuss is about. Sorry @NobelPrize, this sketch is not an accurate description of DD83. Let me explain... DD83 consider a group of individuals with spending/investment opportunities that appear randomly over time. One would like to have money readily available should an opportunity appear sooner. But money has a poor return relative to other assets.
Sep 17, 2022 • 8 tweets • 2 min read
What does it mean to say "inflation is too high?" 🤔 Suppose the economy is hit by a shock that disproportionately affects those in the bottom half of the income distribution. Most would agree some redistribution of purchasing power is needed. Suppose further that total production is reduced. What is the best way to redistribute?
Jun 28, 2022 • 15 tweets • 4 min read
This is correct, in my view. But I do have some comments/quibbles. I offer my 2 cents worth below.🙂 First, the current inflation was not sparked by fiscal policy. It was sparked by the Covid-19 crisis, which necessitated a fiscal response (most of which was appropriate, some of which was overdone). Second, the current inflation persists in part because of the 2022 war shock.
Jun 11, 2022 • 10 tweets • 2 min read
Neoclassical theory: labor market determines the real wage (division of surplus b/w worker and firm).

Central banker: labor market determines price-inflation. Real wage is given by w = W/P, where W = nominal wage and P = price-level. So, we can write P = (1/w)W. Seems like higher W leads to higher P. But we can also write W = w*P. Now, higher P leads to higher W.
Jun 9, 2022 • 5 tweets • 1 min read
Rohan is mostly wrong here, but it’s understandable why he expresses this view. It is the byproduct of believing in the “labor market theory of inflation.” Unforced error on the part of (some) Fed officials in communicating intended monetary transmission mechanism. Fed should welcome labor market tightness. It means higher *real* wages (and lower profit margins). In fact, real wages are not rising for most people. How is this evidence of a tight labor market?
Jun 9, 2022 • 8 tweets • 2 min read
Neoclassical theory and full employment.

I often hear "neoclassical theory assumes continuous market-clearing and full employment," a statement laced with the implication that this is one reason why the theory is fatally flawed.

Not so fast... While it would be good to first define terms, I'm not going to do that here. Just be aware that people may have different notions of what constitutes "neoclassical theory" and "full employment."
Jun 2, 2022 • 13 tweets • 3 min read
Larry Summers suggests Fed needs to do some soul-searching.

Transcript: The Path Forward: The U.S. Economy with washingtonpost.com/washington-pos… Agree with some, but not all, of what Summers says in this piece. First, to be fair, the Fed did engage in quite a bit of soul-searching prior to the pandemic, culminating with a new policy framework that arose out its "Fed Listens" program: federalreserve.gov/monetarypolicy…
May 26, 2022 • 7 tweets • 2 min read
The recommended policy is a little too Draconian for my taste. Also, I'm not sure about the claim that SCs cannot be stable w/o government backing. In the theory of bank runs in the Diamond & Dybvig (1983) tradition, banks can be rendered stable (run-proof) w/o government intervention--as long as the deposit contract is designed to achieve this result (which, may or may not be optimal, by the way, but that's another story).
May 25, 2022 • 18 tweets • 4 min read
I like it. In terms of teaching this idea, I find it useful to proceed in two steps. First step: consolidate private banks into a single entity. This means we don't have to worry about interbank payments. Second step: consider the complications introduced by having multiple banks.