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The FTPL: some skeptical remarks Harald Uhlig 1 1 University of Chicago Department of Economics [email protected] April 1st, 2016 Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 1 / 17

The FTPL: some skeptical remarks€¦ · Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 16 / 17 Conclusions of a Skeptic 1 Lots of colleagues

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Page 1: The FTPL: some skeptical remarks€¦ · Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 16 / 17 Conclusions of a Skeptic 1 Lots of colleagues

The FTPL: some skeptical remarks

Harald Uhlig1

1University of ChicagoDepartment of Economics

[email protected]

April 1st, 2016

Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 1 / 17

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Outline

Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 2 / 17

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Five questions to FTPL advocates1 What does FTPL want to be?

◮ A theory that can be consistent with the data? OK◮ An equation needed to complete a system? OK◮ A theoretical or extreme possibility? OK◮ A set of predictions, which occasionally work in exotic

circumstances (“Brazil”)? PERHAPS◮ A set of predictions, which help often (“Taylor coeff < 1”)? ?◮ A useful framework for practitioners? ?◮ The miracle cure for the failures of other inflation theories? ?◮ A framework for the key interplay of fiscal and monetary policy? ?

2 Where is the “smoking gun”? What set of facts “scream” FTPL?Specific predictions?

3 Why is sovereign default off the table? Sure, a central bank canaccommodate by inflating away debt ... is that all?

4 The US, Japan, the Eurozone have a near-deflation problem (isit?). Do you advocate “irresponsible” fiscal policies to solve this?

5 What advice would you give the sunspot-branch of macro?

Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 3 / 17

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What determines the price level, Pt?

1 FTPL: Gov. budget constraint (without default)

Debtnomt

Pt= NPVreal

t (Primary fiscal surpluses)

or:(Debtnom/Y nom)t

Pt= (NPVreal/Y nom)t

2 Quantity Theory: define velocity Vt ,

MtVt = PtYt = Y nomt

3 New Keynesian Theory:

[left intentionally blank]

Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 4 / 17

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What determines inflation, πt?1 FTPL:

πt = gDebtnom

,t− g

NPVreal,t

2 Quantity Theory:πt = gM,t − gY ,t

orVt ≡ V̄

3 New Keynesian Theory:

Phillips: πt = βEt [πt+1] + κxt + ǫpt

IS: xt = Et [xt+1]−1σ(it − Et [πt+1]− r̄ ) + ǫd

t

Taylor rule: it = r̄ + π̄ + φπ(πt − π̄) + φxxt + ǫmt

Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 5 / 17

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Inflation in the US

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Inflation vs Debt Change in the US

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DEBT/GDP in the US

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Inflation in Japan

Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 9 / 17

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DEBT/GDP in Japan

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Velocity of Money (M2): US

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Velocity of Money (M2): Japan, US, Europe

Source: http://thereformedbroker.com/2015/10/08/chart-o-the-day-the-non-velocity-of-money/

(Joshua M Brown, “Chart o’ the Day: The (non) Velocity of Money”, Oct-8-2015)

Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 12 / 17

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Monetary Policy Rules

M

i

(FFR)

MD MS=M

MS: i=i

Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 13 / 17

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The US narrative for inflation

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A new US narrative for inflation?

Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 15 / 17

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Can you calculate the price level, Pt?

1 FTPL: Gov. budget constraint (without default)

Pt =Debtnom

t

NPVrealt

(1)

2 Quantity Equation: define velocity Vt ,

Pt =Mt V̄Yt

(2)

3 I would use (1), not (2).4 Ok, “calculate” does not mean “determine”. Still ...

Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 16 / 17

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Conclusions of a Skeptic

1 Lots of colleagues now dismiss FTPL out of hand. Perhaps, theyshouldn’t be. Scientists should remain open-minded (how long?).

2 Inflation is hard to explain. If FTPL wants to be the alternative,make it compelling.

3 Fiscal-monetary policy interaction is interesting. Much of that isoutside FTPL.

4 How to bring back dismissive colleagues? Tough. Compellingnarratives, compelling evidence and “smoking guns” may be agood start.

Harald Uhlig (University of Chicago) The FTPL: some skeptical remarks April 1st, 2016 17 / 17