Archive for June 13th, 2017

What do we mean by inflation? General Price rise or rise in money supply?

June 13, 2017

From an ignored term, inflation stands for anything inflated these days.

However, for macro people inflation is critical. There is always this thing you keep reading about how monetary policy should lower inflation (though in developed countries the demand is for raising inflation).

The original inflation implied rise in money supply. But today when we say inflation, we actually mean the rise in price level. This rise in price level is actually an outcome of the rise in money supply. We need to distinguish these ideas clearly as we teach.

Frank Shotsak explains:

Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation.


This increase in the money supply — not changes in prices —  is what sets in motion the misallocation of resources. Moreover, the beneficiaries of the newly created money (i.e., money out of “thin air”) are always the first recipients of money, and so they can divert a greater portion of wealth to themselves. Obviously, those who either do not receive any of the newly created money, or get it last, will find that what is left for them is a diminished portion of the pool of real wealth.

Additionally, real incomes fall not because of general rises in prices as such, but because of increases in the money supply, which gives rise to non-productive consumption. In other words, inflation (i.e. increases in money supply) undermines the production of real wealth, which over time lowers individuals’ living standards. 

General increases in prices, which follow increases in money supply, is an indication — as it were — that the erosion of peoples’ purchasing power has taken place.

In this case, it is not the symptoms of a disease, but the disease itself, that causes the physical damage. Similarly, it is not a general rise in prices but an increase in the money supply (i.e. inflation) that inflicts the physical damage on wealth generators.

Someone in the comments section says: In my ECON classes I use the terms “monetary inflation” and “price inflation” and point out that the first causes the second.


How these basic ideas get lost overtime…

How the illegitimate heir became a ‘bastard’ in medieval Europe

June 13, 2017

Interesting piece by Prof Sara Mcdougall (History) of City University of New York. The piece is on history of bastardy:

Understanding the changing meanings of bastardy helps us to arrive at a clearer picture of the workings and priorities of medieval society before the 13th century. Society then did not operate subject to rigid Christian canon law rules. Instead, it measured the value of its leaders based on their claims to celebrated ancestry, and the power attached to that kind of legitimacy. To be sure, marrying legitimately certainly received a good deal of lip service throughout the Middle Ages. Nevertheless, in this pre-13th-century world, the most intense attention was paid not to the formation of legitimate marriages, but to the lineage and respectability of mothers. Only beginning in the second half of the 12th century did birth outside of lawful marriage begin to render a child illegitimate, a ‘bastard’, and as such potentially ineligible to inherit noble or royal title.

How Social constructs form and then change overtime…

The Argentine-American lemon war of 2001-2017

June 13, 2017

Didn’t know about this at all.

Apparently, US has banned import of Lemons from Argentina since 2001. It was partly successful lobbying from California citrus and partly fear of pests:


Bank of Israel holds interest rate discussions at two levels…

June 13, 2017

This report from Bank of Israel caught my eye. Most central bank call such reports as Minutes of Monetary Policy Committee meeting. However, BoI euphemistically calls it as Report to the public on interest rate discussions.

It does not end there. In BoI, the interest rate discussions are held at two levels, broad and narrow. Spot the differences between the two:


Bhutan Implements IMF’s Enhanced General Data Dissemination System

June 13, 2017

Why Bhutan why? It is one country which has rejected the so called modern economic system.

A mission of the International Monetary Fund’s Statistics Department visited Thimphu during April 5 – April 11, 2017, to assist Bhutan with the implementation of the Enhanced General Data Dissemination System (e‑GDDS), which was endorsed by the IMF’s Executive Board in May 2015. The mission helped develop the National Summary Data Page (NSDP), utilizing the Statistical Data and Metadata Exchange (SDMX). This makes Bhutan one of the first countries in the Asia and Pacific Region to implement the recommendations of the e-GDDS.

The NSDP is posted on the National Statistics Bureau’s website. A link to Bhutan’s NSDP is available on the IMF’s Dissemination Standards Bulletin Board (DSBB) at

Publication of essential macroeconomic data through the new NSDP will provide national policy makers, domestic and international stakeholders, including investors and rating agencies–with easy access to information that the IMF’s Executive Board has identified as critical for monitoring economic conditions and policies. Making this information easily accessible will allow all users to have simultaneous access to timely data and will bring greater data transparency.

The authorities are very pleased that Bhutan has achieved this important milestone in its quest for dissemination of quality statistics following international data standards.

This blog is not as happy..

Summing up macro models..

June 13, 2017

Noah Smith has a presentation on macro models. Broadly, he says there are 3 types of models: for academia, for central banks and for financial industry.

I’d like to close the chapter of my life that involves complaining about macroeconomics. I’ve been out of that world long enough that it’s becoming a distant memory. And much more qualified critics are on the job. Furthermore, macroeconomists I talk to – especially young macroeconomists – mostly seem to have heard and internalized all of the critiques. That doesn’t mean I want to stop following developments in the macro field, but that my days as a certified “macro-basher” have come to an end.

So when the Norwegian Finance Ministry, Norges Bank and Statistics Norway asked me to give a talk about “What Has Happened in Macroeconomics (and what still needs to be done)”, I viewed it as an opportunity to sum up. Here are the slides from that talk.

Hmm.. Quote good.  Hope he writes a paper on this for more details.