Connect with us

Government

How do interest rates lower inflation?

 A few days ago I gave a short talk on the subject. I was partly inspired by a little comment made at a seminar, roughly "of course we all know that if…

Published

on

 

A few days ago I gave a short talk on the subject. I was partly inspired by a little comment made at a seminar, roughly "of course we all know that if prices are sticky, higher nominal rates raise higher real rates, that lowers aggregate demand and lowers inflation." Maybe we "know" that, but it's not as readily present in our models as we think. This also crystallizes some work in the ongoing "Expectations and the neutrality of interest rates" project. 

The equations are the utterly standard new-Keynesian model. The last equation tracks the evolution of the real value of the debt, which is usually in the footnotes of that model. 

OK, top right, the standard result. There is a positive but temporary shock to the monetary policy rule, u. Interest rates go up and then slowly revert. Inflation goes down. Hooray. (Output also goes down, as the Phillips Curve insists.) 

The next graph should give you pause on just how you interpreted the first one. What if the interest rate goes up persistently? Inflation rises, suddenly and completely matching the rise in interest rate! Yet prices are quite sticky -- k = 0.1 here. Here I drove the persistence all the way to 1, but that's not crucial. With any persistence above 0.75, higher interest rates give rise to higher inflation. 

What's going on? Prices are sticky, but inflation is not sticky. In the Calvo model only a few firms can change price in any instant, but they change by a large amount, so the rate of inflation can jump up instantly just as it does. I think a lot of intuition wants inflation to be sticky, so that inflation can slowly pick up after a shock. That's how it seems to work in the world, but sticky prices do not deliver that result. Hence, the real interest rate doesn't change at all in response to this persistent rise in nominal interest rates.  Now maybe inflation is sticky, costs apply to the derivative not the level, but absolutely none of the immense literature on price stickiness considers that possibility or how in the world it might be true, at least as far as I know. Let me know if I'm wrong. At a minimum, I hope I have started to undermine your faith that we all have easy textbook models in which higher interest rates reliably lower inflation. 

(Yes, the shock is negative. Look at the Taylor rule. This happens a lot in these models, another reason you might worry. The shock can go in a different direction from observed interest rates.) 

Panel 3 lowers the persistence of the shock to a cleverly chosen 0.75. Now (with sigma=1, kappa=0.1, phi= 1.2), inflation now moves with no change in interest rate at all.  The Fed merely announces the shock and inflation jumps all on its own. I call this "equilibrium selection policy" or "open mouth policy." You can regard this as a feature or a bug. If you believe this model, the Fed can move inflation just by making speeches! You can regard this as powerful "forward guidance." Or you can regard it as nuts. In any case, if you thought that the Fed's mechanism for lowering inflation is to raise nominal interest rates, inflation is sticky, real rates rise, output falls and inflation falls, well here is another case in which the standard model says something else entirely. 

Panel 4 is of course my main hobby horse these days. I tee up the question in Panel 1 with the red line. In that panel, the nominal interest are is higher than the expected inflation rate. The real interest rate is positive. The costs of servicing the debt have risen. That's a serious effect nowadays. With 100% debt/GDP each 1% higher real rate is 1% of GDP more deficit, $250 billion dollars per year. Somebody has to pay that sooner or later. This "monetary policy" comes with a fiscal tightening. You'll see that in the footnotes of good new-Keynesian models: lump sum taxes come along to pay higher interest costs on the debt. 

Now imagine Jay Powell comes knocking to Congress in the middle of a knock-down drag-out fight over spending and the debt limit, and says "oh, we're going to raise rates 4 percentage points. We need you to raise taxes or cut spending by $1 trillion to pay those extra interest costs on the debt." A laugh might be the polite answer. 

So, in the last graph, I ask, what happens if the Fed raises interest rates and fiscal policy refuses to raise taxes or cut spending? In the new-Keynesian model there is not a 1-1 mapping between the shock (u) process and interest rates. Many different u produce the same i. So, I ask the model, "choose a u process that produces exactly the same interest rate as in the top left panel,  but needs no additional fiscal surpluses." Declines in interest costs of the debt (inflation above interest rates) and devaluation of debt by period 1 inflation must match rises in interest costs on the debt (inflation below interest rates). The bottom right panel gives the answer to this question. 

Review: Same interest rate, no fiscal help? Inflation rises. In this very standard new-Keynesian model,  higher interest rates without a concurrent fiscal tightening raise inflation, immediately and persistently. 

Fans will know of the long-term debt extension that solves this problem, and I've plugged that solution before (see the "Expectations" paper above).

The point today: The statement that we have easy simple well understood textbook models, that capture the standard intuition -- higher nominal rates with sticky prices mean higher real rates, those lower output and lower inflation -- is simply not true. The standard model behaves very differently than you think it does. It's amazing how after 30 years of playing with these simple equations, verbal intuition and the equations remain so far apart. 

The last two bullet points emphasize two other aspects of the intuition vs model separation. Notice that even in the top left graph, higher interest rates (and lower output) come with rising inflation. At best the higher rate causes a sudden jump down in inflation -- prices, not inflation, are sticky even in the top left graph -- but then inflation steadily rises. Not even in the top left graph do higher rates send future inflation lower than current inflation. Widespread intuition goes the other way. 

In all this theorizing, the Phillips Curve strikes me as the weak link. The Fed and common intuition make the Phillips Curve causal: higher rates cause lower output cause lower inflation. The original Phillips Curve was just a correlation, and Lucas 1972 thought of causality the other way: higher inflation fools people temporarily to producing more. 


 

Here is the Phillips curve (unemployment x axis, inflation y axis) from 2012 through last month. The dots on the lower branch are the pre-covid curve, "flat" as common wisdom proclaimed. Inflation was still 2% with unemployment 3.5% on the eve of the pandemic. The upper branch is the more recent experience. 

I think this plot makes some sense of the Fed's colossal failure to see inflation coming, or to perceive it once the dragon was inside the outer wall and breathing fire at the inner gate. If you believe in a Phillips Curve, causal from unemployment (or "labor market conditions") to inflation, and you last saw 3.5% unemployment with 2% inflation in February 2021, the 6% unemployment of March 2021 is going to make you totally ignore any inflation blips that come along. Surely, until we get well past 3.5% unemployment again, there's nothing to worry about. Well, that was wrong. The curve "shifted" if there is a curve at all. 

But what to put in its place? Good question. 

Read More

Continue Reading

Government

Are Voters Recoiling Against Disorder?

Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super…

Published

on

Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super Tuesday primaries have got it right. Barring cataclysmic changes, Donald Trump and Joe Biden will be the Republican and Democratic nominees for president in 2024.

(Left) President Joe Biden delivers remarks on canceling student debt at Culver City Julian Dixon Library in Culver City, Calif., on Feb. 21, 2024. (Right) Republican presidential candidate and former U.S. President Donald Trump stands on stage during a campaign event at Big League Dreams Las Vegas in Las Vegas, Nev., on Jan. 27, 2024. (Mario Tama/Getty Images; David Becker/Getty Images)

With Nikki Haley’s withdrawal, there will be no more significantly contested primaries or caucuses—the earliest both parties’ races have been over since something like the current primary-dominated system was put in place in 1972.

The primary results have spotlighted some of both nominees’ weaknesses.

Donald Trump lost high-income, high-educated constituencies, including the entire metro area—aka the Swamp. Many but by no means all Haley votes there were cast by Biden Democrats. Mr. Trump can’t afford to lose too many of the others in target states like Pennsylvania and Michigan.

Majorities and large minorities of voters in overwhelmingly Latino counties in Texas’s Rio Grande Valley and some in Houston voted against Joe Biden, and even more against Senate nominee Rep. Colin Allred (D-Texas).

Returns from Hispanic precincts in New Hampshire and Massachusetts show the same thing. Mr. Biden can’t afford to lose too many Latino votes in target states like Arizona and Georgia.

When Mr. Trump rode down that escalator in 2015, commentators assumed he’d repel Latinos. Instead, Latino voters nationally, and especially the closest eyewitnesses of Biden’s open-border policy, have been trending heavily Republican.

High-income liberal Democrats may sport lawn signs proclaiming, “In this house, we believe ... no human is illegal.” The logical consequence of that belief is an open border. But modest-income folks in border counties know that flows of illegal immigrants result in disorder, disease, and crime.

There is plenty of impatience with increased disorder in election returns below the presidential level. Consider Los Angeles County, America’s largest county, with nearly 10 million people, more people than 40 of the 50 states. It voted 71 percent for Mr. Biden in 2020.

Current returns show county District Attorney George Gascon winning only 21 percent of the vote in the nonpartisan primary. He’ll apparently face Republican Nathan Hochman, a critic of his liberal policies, in November.

Gascon, elected after the May 2020 death of counterfeit-passing suspect George Floyd in Minneapolis, is one of many county prosecutors supported by billionaire George Soros. His policies include not charging juveniles as adults, not seeking higher penalties for gang membership or use of firearms, and bringing fewer misdemeanor cases.

The predictable result has been increased car thefts, burglaries, and personal robberies. Some 120 assistant district attorneys have left the office, and there’s a backlog of 10,000 unprosecuted cases.

More than a dozen other Soros-backed and similarly liberal prosecutors have faced strong opposition or have left office.

St. Louis prosecutor Kim Gardner resigned last May amid lawsuits seeking her removal, Milwaukee’s John Chisholm retired in January, and Baltimore’s Marilyn Mosby was defeated in July 2022 and convicted of perjury in September 2023. Last November, Loudoun County, Virginia, voters (62 percent Biden) ousted liberal Buta Biberaj, who declined to prosecute a transgender student for assault, and in June 2022 voters in San Francisco (85 percent Biden) recalled famed radical Chesa Boudin.

Similarly, this Tuesday, voters in San Francisco passed ballot measures strengthening police powers and requiring treatment of drug-addicted welfare recipients.

In retrospect, it appears the Floyd video, appearing after three months of COVID-19 confinement, sparked a frenzied, even crazed reaction, especially among the highly educated and articulate. One fatal incident was seen as proof that America’s “systemic racism” was worse than ever and that police forces should be defunded and perhaps abolished.

2020 was “the year America went crazy,” I wrote in January 2021, a year in which police funding was actually cut by Democrats in New York, Los Angeles, San Francisco, Seattle, and Denver. A year in which young New York Times (NYT) staffers claimed they were endangered by the publication of Sen. Tom Cotton’s (R-Ark.) opinion article advocating calling in military forces if necessary to stop rioting, as had been done in Detroit in 1967 and Los Angeles in 1992. A craven NYT publisher even fired the editorial page editor for running the article.

Evidence of visible and tangible discontent with increasing violence and its consequences—barren and locked shelves in Manhattan chain drugstores, skyrocketing carjackings in Washington, D.C.—is as unmistakable in polls and election results as it is in daily life in large metropolitan areas. Maybe 2024 will turn out to be the year even liberal America stopped acting crazy.

Chaos and disorder work against incumbents, as they did in 1968 when Democrats saw their party’s popular vote fall from 61 percent to 43 percent.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times or ZeroHedge.

Tyler Durden Sat, 03/09/2024 - 23:20

Read More

Continue Reading

Government

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The…

Published

on

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The U.S. Department of Veterans Affairs (VA) reviewed no data when deciding in 2023 to keep its COVID-19 vaccine mandate in place.

Doses of a COVID-19 vaccine in Washington in a file image. (Jacquelyn Martin/Pool/AFP via Getty Images)

VA Secretary Denis McDonough said on May 1, 2023, that the end of many other federal mandates “will not impact current policies at the Department of Veterans Affairs.”

He said the mandate was remaining for VA health care personnel “to ensure the safety of veterans and our colleagues.”

Mr. McDonough did not cite any studies or other data. A VA spokesperson declined to provide any data that was reviewed when deciding not to rescind the mandate. The Epoch Times submitted a Freedom of Information Act for “all documents outlining which data was relied upon when establishing the mandate when deciding to keep the mandate in place.”

The agency searched for such data and did not find any.

The VA does not even attempt to justify its policies with science, because it can’t,” Leslie Manookian, president and founder of the Health Freedom Defense Fund, told The Epoch Times.

“The VA just trusts that the process and cost of challenging its unfounded policies is so onerous, most people are dissuaded from even trying,” she added.

The VA’s mandate remains in place to this day.

The VA’s website claims that vaccines “help protect you from getting severe illness” and “offer good protection against most COVID-19 variants,” pointing in part to observational data from the U.S. Centers for Disease Control and Prevention (CDC) that estimate the vaccines provide poor protection against symptomatic infection and transient shielding against hospitalization.

There have also been increasing concerns among outside scientists about confirmed side effects like heart inflammation—the VA hid a safety signal it detected for the inflammation—and possible side effects such as tinnitus, which shift the benefit-risk calculus.

President Joe Biden imposed a slate of COVID-19 vaccine mandates in 2021. The VA was the first federal agency to implement a mandate.

President Biden rescinded the mandates in May 2023, citing a drop in COVID-19 cases and hospitalizations. His administration maintains the choice to require vaccines was the right one and saved lives.

“Our administration’s vaccination requirements helped ensure the safety of workers in critical workforces including those in the healthcare and education sectors, protecting themselves and the populations they serve, and strengthening their ability to provide services without disruptions to operations,” the White House said.

Some experts said requiring vaccination meant many younger people were forced to get a vaccine despite the risks potentially outweighing the benefits, leaving fewer doses for older adults.

By mandating the vaccines to younger people and those with natural immunity from having had COVID, older people in the U.S. and other countries did not have access to them, and many people might have died because of that,” Martin Kulldorff, a professor of medicine on leave from Harvard Medical School, told The Epoch Times previously.

The VA was one of just a handful of agencies to keep its mandate in place following the removal of many federal mandates.

“At this time, the vaccine requirement will remain in effect for VA health care personnel, including VA psychologists, pharmacists, social workers, nursing assistants, physical therapists, respiratory therapists, peer specialists, medical support assistants, engineers, housekeepers, and other clinical, administrative, and infrastructure support employees,” Mr. McDonough wrote to VA employees at the time.

This also includes VA volunteers and contractors. Effectively, this means that any Veterans Health Administration (VHA) employee, volunteer, or contractor who works in VHA facilities, visits VHA facilities, or provides direct care to those we serve will still be subject to the vaccine requirement at this time,” he said. “We continue to monitor and discuss this requirement, and we will provide more information about the vaccination requirements for VA health care employees soon. As always, we will process requests for vaccination exceptions in accordance with applicable laws, regulations, and policies.”

The version of the shots cleared in the fall of 2022, and available through the fall of 2023, did not have any clinical trial data supporting them.

A new version was approved in the fall of 2023 because there were indications that the shots not only offered temporary protection but also that the level of protection was lower than what was observed during earlier stages of the pandemic.

Ms. Manookian, whose group has challenged several of the federal mandates, said that the mandate “illustrates the dangers of the administrative state and how these federal agencies have become a law unto themselves.”

Tyler Durden Sat, 03/09/2024 - 22:10

Read More

Continue Reading

Government

Low Iron Levels In Blood Could Trigger Long COVID: Study

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate…

Published

on

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate iron levels in their blood due to a COVID-19 infection could be at greater risk of long COVID.

(Shutterstock)

A new study indicates that problems with iron levels in the bloodstream likely trigger chronic inflammation and other conditions associated with the post-COVID phenomenon. The findings, published on March 1 in Nature Immunology, could offer new ways to treat or prevent the condition.

Long COVID Patients Have Low Iron Levels

Researchers at the University of Cambridge pinpointed low iron as a potential link to long-COVID symptoms thanks to a study they initiated shortly after the start of the pandemic. They recruited people who tested positive for the virus to provide blood samples for analysis over a year, which allowed the researchers to look for post-infection changes in the blood. The researchers looked at 214 samples and found that 45 percent of patients reported symptoms of long COVID that lasted between three and 10 months.

In analyzing the blood samples, the research team noticed that people experiencing long COVID had low iron levels, contributing to anemia and low red blood cell production, just two weeks after they were diagnosed with COVID-19. This was true for patients regardless of age, sex, or the initial severity of their infection.

According to one of the study co-authors, the removal of iron from the bloodstream is a natural process and defense mechanism of the body.

But it can jeopardize a person’s recovery.

When the body has an infection, it responds by removing iron from the bloodstream. This protects us from potentially lethal bacteria that capture the iron in the bloodstream and grow rapidly. It’s an evolutionary response that redistributes iron in the body, and the blood plasma becomes an iron desert,” University of Oxford professor Hal Drakesmith said in a press release. “However, if this goes on for a long time, there is less iron for red blood cells, so oxygen is transported less efficiently affecting metabolism and energy production, and for white blood cells, which need iron to work properly. The protective mechanism ends up becoming a problem.”

The research team believes that consistently low iron levels could explain why individuals with long COVID continue to experience fatigue and difficulty exercising. As such, the researchers suggested iron supplementation to help regulate and prevent the often debilitating symptoms associated with long COVID.

It isn’t necessarily the case that individuals don’t have enough iron in their body, it’s just that it’s trapped in the wrong place,” Aimee Hanson, a postdoctoral researcher at the University of Cambridge who worked on the study, said in the press release. “What we need is a way to remobilize the iron and pull it back into the bloodstream, where it becomes more useful to the red blood cells.”

The research team pointed out that iron supplementation isn’t always straightforward. Achieving the right level of iron varies from person to person. Too much iron can cause stomach issues, ranging from constipation, nausea, and abdominal pain to gastritis and gastric lesions.

1 in 5 Still Affected by Long COVID

COVID-19 has affected nearly 40 percent of Americans, with one in five of those still suffering from symptoms of long COVID, according to the U.S. Centers for Disease Control and Prevention (CDC). Long COVID is marked by health issues that continue at least four weeks after an individual was initially diagnosed with COVID-19. Symptoms can last for days, weeks, months, or years and may include fatigue, cough or chest pain, headache, brain fog, depression or anxiety, digestive issues, and joint or muscle pain.

Tyler Durden Sat, 03/09/2024 - 12:50

Read More

Continue Reading

Trending