Recently I’ve been trying to get my head around the difference between a “sterilized” asset purchase by a central bank and an “unsterilized” purchase. Here is where I’ve gotten to – happy for any comments or clarifications!Read more
I’ve heard the arguments that secular stagnation refers to a situation with low long-term interest rates – reaching the zero lower bound on nominal rate often – low inflation and low output growth. But what does this really mean?
It took me a while to convince myself to write about “neo-fisherism” as a solution to low trend inflation.
The motivation behind neo-fisherism is relatively intuitive – we have observed nominal interest rates and inflation move together, and require an explanation that supports that stylised fact. Furthermore, the idea behind neo-fisherism is that there is the Fisher effect describes how inflation expectations must move when nominal interest rate goes changes – allowing us to keep our assumption of “neutrality” in the long run with a fixed real interest rate, rather than relying on changes in the neutral real rate of interest.
However, at face value this completely contradicts the conventional monetary policy set up, where we were taught that inflation rate and nominal interest rate follow the Taylor principle, so that when you cut the nominal interest rate, then inflation (and inflation expectations) goes up. Given this way of thinking, and the empirical regularity that inflation and nominal interest rates DO move together, does this overturn conventional monetary economics?
In my previous posts on the liquidity trap and about US Treasury bond purchases I have mentioned that central banks and governments should coordinate their policies as a part of unconventional monetary policy when the interest rates are near the zero lower bound and inflation is persistently low.
However, there are costs and benefits associated with any coordination game. The benchmark coordination model and the restricted version of it are well described in English, Erceg, Lopez-Salido 2017. Read more