Foot Tingling After Cut On Foot

Deconstructing Rally 2011 Inflation (II) Deconstructing

Money, like Janus, has two faces: past and future at the same time it represents (as we said ) what was and also all that be.

In a different dimension, money includes a second duality important: money balances, which is calculated as an asset to the private sector, they represent a liability to the Central Bank.

From political arithmetic and undesirable interactions

By definition, the issue of money by the Central Bank has as its counterpart increasing or decreasing asset net worth of the entity. It is clear, moreover, that different ways of altering the composition of the balance may pursue different objectives: for example, the purchase of foreign assets through issuance of money alter the foreign exchange market. But we are not interested in this case the reasons why the central bank can print money, but simply to draw attention that you have the power to do: we repeat, is the sole agent of the economy that counts for this purpose as part liabilities.

But the Central Bank is primarily a public sector body "monetary issue can then be completely independent of the decisions of revenues, expenditures and financing of public policy?

The same questions were Thomas Sargent and Neil Wallace (1981) . The point is relatively simple: when consolidating the budget constraint of the Central Bank with the public sector (ie, it takes both players as if they were one) shows that the only way to finance expenditures that exceed their income is through the issuance of any liability. This would be completely trivial, since by definition all excess spending must be matched by an increase or decrease the obligations of assets, if it were not for this new agent, to include the Central Bank has the possibility of financing through printing money.

By this logic, the authors found that in a context where the public sector has a financial deficit and there are limits to its indebtedness, is inconsistent jointly announce a restrictive monetary policy coupled with an expansionary fiscal policy (in the sense of maintaining a level of spending in excess of income). In the long term, when the public sector can not borrow, monetary policy is dominated by the financing needs of the treasury, taxation policy is determined by the possibilities of expansion of monetary policy.

Is this a general theory about the nature of inflation? Certainly not. First Instead, the mechanism that establishes a causal link from financial deficit to the price increase is certainly questionable. In an inflationary dynamics is reasonable that both variables interact, for example, through wage indexation (of what it would be almost impossible to distinguish which one "moves first"). Moreover, the real variables need not remain unchanged to an increase in the rate of inflation: a simple example, under certain assumptions the increase in demand could alter potential output and solve financial problems Public sector (scenario particularly emphasized in recent times and which we shall return later).

Now, although the work of Sargent and Wallace's criticism, the general proposition, that is born as a result of budget constraints, still stands: in a period of time, which can not be financed through an expansion of borrowing (or a decrease of public sector assets) will be covered by printing money. O, which is identical, a scenario of strong financing needs, monetary policy becomes necessarily passive.

From tactical to practical

The previous proposition has two advantages: not only is relatively simple, but at the same time is a useful tool for approaching two decades full of macroeconomic history Argentina. see then that tells us the "master of life. " A very broad strokes, during the '80 fiscal policy clearly signaled the pace of monetary policy, which for most of the decade was passive to the needs of public sector financing (an excellent job of that with the countless details I'm ignoring it Damill and Frenkel (1990) ).

During the '90s forced the independence of monetary and fiscal policy, but with the emergence of this deficit was only possible through access to capital markets or asset sales. In other words, given the impossibility (legal) to resort to printing money, the Treasury must necessarily go to the credit markets to cover its debt. A very mild this proxy statement in the chart below.

The story, by the time the leave in 2001, where policy rules certainly become more complex ( formation may occur together with the inflation tax surplus).

An interesting point worth noting before saying goodbye is the fact that when the public sector using funding through monetary resources are usually obtained as a result of the inflation tax. What, in other words, it means that an inability to place large debt financing needs of large issues that involve force major price increases. In principle, there is evidence that periods of high inflation in the relationship issue and prices are close, but it becomes blurred in times of relative stability ( Basco, D'Amato and Garegnani (2006) ).

This means that between a state of nature and there is another change, a transformation that makes the economy becomes more prone to respond quickly to the monetary issue. This leads us to wonder about what may be the circumstances.

In the next post will try to negotiate the maze thick economists call expectations. Although, as Erik Lönnrot and Red Scharlach, we run the risk of ending up confusing Janus with Hermes.

Appendix

Step By Step Intructions On Mastrabating

Inflation (I) Incidence

warnings and contraindications

Argentina has had throughout its history long periods of inflation high and, at the moment, one of the countries with the highest rate of growth of world prices. In the next post I will try to address this issue, believing that it has become a major economic challenges our country.

The causes as well as the consequences of sustained growth in the general level of prices are a topic of constant (and inconclusive) debate, both in academia and government. Inhibits the complexity of the problem, I think, the ability to fully embrace, in one fell swoop, without the risk of ridicule or just be trivial. Of the many ways you could address this issue believe that the simplest, but also the most cowardly, is trying to offer a small glimpse into some of the leading edges of it and leave in any case, that the reader attempt to delineate the fuzzy image of the painting only by those short strokes. The vision will necessarily be partial and incomplete. Noblesse oblige: my vision of the problem is, if anything, biased and incomplete.

A couple of months now, and in response to a post of Finance , many bloggers got into a interesting discussion on the possibility for the "inflation tax" to be a tax. To avoid this kind of debate, I will dedicate this post to the (tedious) task of making precise clarifications on the definitions we use. As a bonus, the end is a comment on what I believe is the error Musgrave (a cheap shot if I did not say it now, but hopefully that will generate enough attention to reach the last lines).

The attached final something like a pauper rather mathematical appendix, which attempts to clarify some questions about definitions (I know slightly forgiven for dawn service.)

Preludiando

Money is a strange object: future promise, the desire to keep it arises indirectly as a derived demand. For decades, economists know that without rigidities in the exchange (the interactions with the "dark forces of time" or the clearest, between individuals) money would have no reason to exist. In other words, money makes possible interactions that would otherwise not be carried out. "If you iron my shirts, it is because another human being, depending on your options, which suits me just suits me. The essence of the exchange is precisely that each of the parties leaves the satisfying their own needs, better suited because it indirectly through exchange "Depablos disclosed. The very basis of a complex economy (in the number of goods) and decentralized (in terms of multiple decision agents involved in it) force the emergence of a payment ( Howitt and Clower (1999) ).

The money provides a liquidity facility, as stated, allowing agents to transact. Another nice metaphor to help understand the essence of the phenomenon behind the existence of money is to think that it could be replaced by a giant grocer account, which computes all our daily transactions with all other economic agents (a short version of the argument can be found in Leijonhufvud (1998) and more elaborate in Kocherlakota (1998) ). Money is an evil device, combination of individuals, goods, time and space. But above all, a promise of future ownership of a property, to be effective, accurate back in time. If there were no problems in exchanging the currency would be replaced by any other asset with positive returns. Money has, therefore, a cost, as a force to give up performance.

Three definitions, two constraints and an error

What is the cost of money?

Buiter (2009) performs three definitions, which I believe are necessary to give a precise answer to this question (which discrete-time use). The first corresponds to the nominal expenditure incurred by individuals, in present value terms, to maintain an asset that pays no interest, and is known as the "Central Bank Income"

IBC (t) = R (t) / (1 + R (t)) M (t-1)

Intuitively, the lost "weight" between money and bonds is the nominal interest rate. Since the loss occurs in the second period (is denominated in pesos of the post), it must be discounted. Now, in order to accumulate money, individuals must give up costs. The accumulation of stocks rated by the private sector is what is commonly known as seigniorage:

S (t) = M (t)-M (t-1)

When this accumulation of assets is considered in real terms, we can see that seigniorage has two components:

s (t) = m (t)-m (t-1) + π (t) / (1 + π (t)) m (t-1)

The first component corresponds to the resources transferred by the private sector by increasing holdings of real balances, while the second component is conventionally known as the "inflation tax"

ii (t) = π (t) / (1 + π (t)) m (t-1)

As can be seen, whenever there is inflation, the private sector resources should resign holdings real balances. In other words, the inflation tax is negative real returns on holdings of money. As an economy, nothing is lost, the conservation law should tell us that the resources from the inflation tax is income from any of the other actors in the economy and (later delve into this) the direct recipient in this case is the Central Bank . The error Musgrave's part to assume the absence of the inflation tax based on the absence of central bank transfers to the Treasury. The reallocation of resources that exists independently of whether or not they turned themselves.

Another important point (about which there was much discussion) is the possibility of a scenario where there is no inflation seigniorage, which is perfectly feasible for an economy to absorb higher volumes real balances. The post-devaluation Argentina is a good example of a phenomenon remonetization, although this, along with some other issues, will be for later.

Appendix

Brazilian Waxing Inland Empire

distributive VAT: how regressive? (2)

In the previous post of This sequence presents the two main approaches to analysis of distributional impact in the context of a consumption tax (per case, VAT) and showed how under a single specification (or "naive") the results back from a point significantly attenuates intertemporal approach when we rehearse. In this note we repeat the exercise by slightly altering the structure of demand. In this case, a certain foundation dotaremos micro analysis by introducing agents to making consumption and savings in a context of life cycle, subject to dissimilar conditions of access to credit. Specifically, we are interested in evaluating the effect of any "credit crunch" on the distributional impact of VAT.

Exercise not-that-naive

begin characterizing the income profiles of individuals. Without loss of generality, we take the distribution of income per capita levels of initial family (in dollars) the previous year and assume a profile for each income decile shaped or inverted, it is increasing in the first part of the cycle and then decreasing (and concave), so that the momentum for revenue growth is equivalent between deciles. This structure does not seem so trite, in light of what is observed empirically. For illustrative purposes, Figure 1 shows the profiles of some deciles.

Then we establish the behavior patterns of agents. The decision rule of consumers arises to solve the optimization program given by equation 1, which by now is a standard specification. For simplicity, equation 2 provides equal subjective discount factors (preferences) and the discount means the "market."

Restrictions credit are defined by Equation 3, and indicate that at any point in time agents can not consume beyond the possibilities that disposable income in that period. Naturally, candidates for imposing this condition are the individuals of the lowest deciles. With this scheme in mind, we evaluated the impact of a value added tax (consumption) with an average of 21% tax rate, imposing credit restrictions (3) over the first six deciles of the distribution, allowing the remaining categories make debt at will.

Note that the restriction amounts to failure to borrow, not save. Therefore, given the income profile of each category, which is noted for individuals "restricted" is a smooth consumption path at a certain period than the original. The following figures show the consumption and income profile of the first decile of the distribution (for which the restriction operates) and the lowest decile (which has perfect access to credit markets).

Figure 2, we see how the restriction operates in the first part of the life cycle, then after a certain period, and because the structure of the agent preferences and their profile income-these deciles save part of their income to finance in the twilight of their lives and ensure a stable consumption level. In particular, from the fourth period, the agent begins to shift consumption towards the future (the dotted line is below the income earned online blue-). The "savings" of each period (purple line) includes the capitalization that are made in each period, so take that. To see the surplus or deficit on the income earned in each period, net of capitalization, just look at the parable of the difference between blue and dotted line consumer.

Moreover, Figure 3 shows a process of smoothing Consumption typical: there is a significant deficit on both ends of the life cycle, which is funded with a lower level of consumption in most productive stage of the agent. Since the ability to bring future consumption at present is available only to the richest deciles, from a VAT point here is progressive, as shown in Figure 4, in conjunction with cumulative incidence analysis and tested in the previous post (for those who have not read, the curves show how much the present value of income represents the present value of taxes paid by consuming, considering up to time t).

Again, which will result in asymptotic neutrality of VAT. And bottomline mode, we noticed that for this specification simple demand heterogeneity in terms of access to credit markets (in the context of preference for stable consumption paths over time) does not introduce regressive VAT.

Discussion

Notwithstanding the above, it should draw attention to some important issues. First, this specification has several aspects to refine, and several assumptions that it is worth to rest in a future post. On the one hand, deliberately avoided modeling explicit credit market (ie not specify who offers credit to these agents or under what conditions, among other things). A quick exit this simplification might be thinking of a small open economy, but it is obvious that the formal determination of the credit market does not affect the outcome in question.

One paragraph deserves the equation (2), which oversimplifies the structure of intertemporal preferences of actors collapsing to a single parameter.

Finally, this result could reversed if in conjunction with restrictions on access to credit inflation is incorporated. These extensions will be addressed in a future post.