Page 27 - THE SOUTH CHINA BUSINESS JOURNAL
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lation expectations, but then don’t tell us much produce
about how those expectations were formed or certain
whether they were roughly correct. levels of inflation
and inflationary
Another approach is to consider a well- expectations remains
accepted relationship whereby nominal interest something of an enigma.
rates are the sum of (expected) inflation and Hence, Yellen’s poser.
a real interest rate, commonly assumed to be
stable over the medium term. A lovely, simple, Perhaps this is all
intuitive expression, but less of an explanation a worry about a non-
than a consequence. For example, it implies problem. After all, theory
that if the Fed raises nominal interest rates to or not, the Fed – along with
counter inflationary pressures, then for the the European Central Bank,
equation to hold inflation must increase, a rather the Bank of England, the Swiss
counterintuitive outcome. National Bank, and others –
seem to have a pretty good handle
One might instead fall back on an older on inflation, neither holding it too low or
tradition relating the quantity of money and goosing it too high. Maybe this is just another
the rate at which it turns over in a period – the of the modern anomalies in economics for which
velocity – to the price level and the volume one shouldn’t look the gift horse in the mouth.
of transactions. But given the evolution of Among the others: Why very low real interest
payments systems, what constitutes “money,” rates persist, especially in light of very substantial
and what use is this theory if the velocity of budget deficits that were supposed to drive
money changes unpredictably and may even be interest rates higher.
in some fundamental manner endogenous to the
economy? Like so many models purporting to It’s tempting to take such a “why worry, be happy”
offer insights into inflation, it’s a lovely equation, attitude, but history suggests such happy periods
but it’s less informative that it appears. don’t last forever. Far more likely it seems, inflation
will someday rise (or worse, fall) far from the Fed’s
Following the Great Recession the eminent target, and lacking a credible theory of inflation,
monetary theorist and former Fed Governor the Fed may not know why or what the proper
Frederic Mishkin observed that Milton Friedman’s remedy would be other than hiking the Fed Funds
adage that “inflation is always and everywhere a rate – which might or might not be the proper
monetary phenomenon” still holds true. This is and effective response. “What, me worry?” versus
a start. But exactly how monetary policy affects “Houston, we have a problem.” I think we should
credit markets under various circumstances to take Janet Yellen’s proposed task seriously.■
South China Business Journal 24
about how those expectations were formed or certain
whether they were roughly correct. levels of inflation
and inflationary
Another approach is to consider a well- expectations remains
accepted relationship whereby nominal interest something of an enigma.
rates are the sum of (expected) inflation and Hence, Yellen’s poser.
a real interest rate, commonly assumed to be
stable over the medium term. A lovely, simple, Perhaps this is all
intuitive expression, but less of an explanation a worry about a non-
than a consequence. For example, it implies problem. After all, theory
that if the Fed raises nominal interest rates to or not, the Fed – along with
counter inflationary pressures, then for the the European Central Bank,
equation to hold inflation must increase, a rather the Bank of England, the Swiss
counterintuitive outcome. National Bank, and others –
seem to have a pretty good handle
One might instead fall back on an older on inflation, neither holding it too low or
tradition relating the quantity of money and goosing it too high. Maybe this is just another
the rate at which it turns over in a period – the of the modern anomalies in economics for which
velocity – to the price level and the volume one shouldn’t look the gift horse in the mouth.
of transactions. But given the evolution of Among the others: Why very low real interest
payments systems, what constitutes “money,” rates persist, especially in light of very substantial
and what use is this theory if the velocity of budget deficits that were supposed to drive
money changes unpredictably and may even be interest rates higher.
in some fundamental manner endogenous to the
economy? Like so many models purporting to It’s tempting to take such a “why worry, be happy”
offer insights into inflation, it’s a lovely equation, attitude, but history suggests such happy periods
but it’s less informative that it appears. don’t last forever. Far more likely it seems, inflation
will someday rise (or worse, fall) far from the Fed’s
Following the Great Recession the eminent target, and lacking a credible theory of inflation,
monetary theorist and former Fed Governor the Fed may not know why or what the proper
Frederic Mishkin observed that Milton Friedman’s remedy would be other than hiking the Fed Funds
adage that “inflation is always and everywhere a rate – which might or might not be the proper
monetary phenomenon” still holds true. This is and effective response. “What, me worry?” versus
a start. But exactly how monetary policy affects “Houston, we have a problem.” I think we should
credit markets under various circumstances to take Janet Yellen’s proposed task seriously.■
South China Business Journal 24
