Mankiw 6e. Experience it.
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Chapter 30: Money Growth and Inflation

Recent Posts
(Note: Page numbers referenced in posts prior to June 1, 2011 refer to 5th edition)

 

September 4

Is Inflation Dead?

Some pundits seem to believe that improvements in how central banks operate mean that low inflation will continue forever. Kenneth Rogoff warns that slow productivity growth, high debt levels, pressure to reduce inequality through transfer payments, and unforeseen shocks may lead to higher inflation in the future.

Textbook References:

Pages 664-665 “Inflationary Threats”

August 7

The Latest from Merle Hazard

The Fed fought the financial crisis and ensuing recession in part by pumping up bank reserves. When the economy recovers, this could generate high inflation if the Fed does not take steps to prevent it. Merle Hazard sings a humorous song about this "Great Unwind."

Textbook References:

Pages 664-665 “Bernanke and the Beast”

April 5

A Hyperinflation Vacation

Graeme Wood argues that dollars (and other stable currencies) are in such high demand in countries with hyperinflation that such places make good vacation destinations.

Textbook References:

Pages 652-654 “Money and Prices during Four Hyperinflations”

January 22

Hyperinflation in Hell

Comedian Yoram Bauman takes a humorous look at hyperinflation in hell.

Textbook References:

Page 652 “Money and Prices during Four Hyperinflations”

February 22

MMT

The Washington Post discusses a school of thought called "Modern Monetary Theory." Its basic premise is that governments can never run out of money because they can print it. Moreover, governments should use that ability to increase spending.

Textbook References:

Page 15 “Principle 9: Prices Rise When Government Prints Too Much Money”
Chapter 30 “Money Growth and Inflation”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”

October 29

More on a Nominal GDP Target

Christina Romer endorses the idea that the Fed should target Nominal GDP.

Textbook References:

Pages 625-627 “The Federal Reserve System”
Chapter 30 “Money Growth and Inflation”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand“
Pages 812-814 “Should Monetary And Fiscal Policymakers Try To Stabilize The Economy?“

October 22

Fates to Avoid

Mankiw warns against the policy blunders made by Zimbabwe, Japan, Greece, and France.

Textbook References:

Pages 7-9 “Principle 4: People Respond to Incentives”
Pages 238-240 “The Fiscal Challenge Ahead”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”
Page 654 “Hyperinflation in Zimbabwe”
Page 662 “Inflation Is Bad, But Deflation May Be Worse”

October 18

A Target Path for Nominal GDP

Economists at Goldman Sachs want the Fed to target Nominal GDP

Textbook References:

Pages 625-627 “The Federal Reserve System”
Chapter 30 “Money Growth and Inflation”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 812-814 “Should Monetary And Fiscal Policymakers Try To Stabilize The Economy?”

September 23

Why I am not very worried about inflation just now

Despite loose monetary policy, Mankiw is not worried about inflation. This is because growth in nominal wages has been so low.

Textbook References:

Pages 644-656 “The Classical Theory of Inflation”
Pages 664-665 “Inflationary Threats”

September 18

Taylor on the Fed's Mandate

John Taylor argues that the Fed's goal should be price stability, not maximum employment.

Textbook References:

Pages 625-627 “The Federal Reserve System”
Chapter 30 “Money Growth and Inflation”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 812-814 “Should Monetary And Fiscal Policymakers Try To Stabilize The Economy?”

June 9

Rajan on Monetary Policy

Raghuram Rajan discusses why extremely low interest rates have not boosted demand. He also notes that the Fed's policy punishes savers.

Textbook References:

Pages 7-9 “Principle 4: People Respond to Incentives”
Pages 644-656 “The Classical Theory of Inflation”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”

June 3

The Mistake of 1937

Gauti Eggertsson notes that policymakers in 1937 confused a rise in the relative prices of commodities for fundamental inflation. The result was bad policy decisions. He wonders if modern policymakers will make the same mistake.

Textbook References:

Pages 514-520 “The Consumer Price Index”
Pages 664-665 “Inflationary Threats”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”

February 27

Empiricists versus Theorists

Christina Romer argues that when inflation is low and the unemployment rate is high, there is little danger of inflation. She says that the Fed could engage in more aggressive quantitative easing, but seems to be overly worried about inflation expectations.

Textbook References:

Pages 14-15 “Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment”
Pages 664-676 “The Classical Theory of Inflation”
Pages 809-810 “The Short-Run Phillips Curve”

January 4

Another Cost of Hyperinflation

Hyperinflation can distort one's perceptions of numbers.

Textbook References:

Pages 672-673 “Money and Prices During Four Hyperinflations”
Page 675 “A Recipe for Economic Disaster”

December 18

Menu Costs During Hyperinflation

A photograph shows how people deal with menu costs during a hyperinflation.

Textbook References:

Page 675 “A Recipe for Economic Disaster”
Page 679 “Menu Costs”

November 13

Help me find the photographer

A photograph shows how worthless Zimbabwe's currency has become.

Textbook References:

Page 675 “A Recipe for Economic Disaster”

October 12

Woodford on Monetary Policy

Michael Woodford argues that the Fed "should allow a one-time-only inflation increase." He argues that such a move would boost current spending via its effect on expectations.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Pages 664-676 “The Classical Theory of Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 821-822 “Bernanke's Challenges”

May 20

Follow the Money

There is a short video showing how money circulates in the U.S.

Textbook References:

Pages 670-672 “Velocity and the Quantity Equation”

March 23

An Inflation Debate

Michael Kinsley and Paul Krugman disagree about how likely hyperinflation is in the U.S.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 591-593 “A History of U.S. Government Debt”
Chapter 30 “Money Growth and Inflation”

January 16

The Inflation Monster

Mankiw considers the chances of significant inflation in the coming years.

Textbook References:

Pages 13-14 “Principle 9: Prices Rise When the Government Prints Too Much Money”
Pages 645-647 “Money in the U.S. Economy”
Chapter 30 “Money Growth and Inflation”

December 28

The Monetary Base is Exploding. So What?

Mankiw argues that the recent increase in the monetary base need not lead to inflation.

Textbook References:

Pages 649-658 “Banks and the Money Supply”
Pages 664-676 “The Classical Theory of Inflation”

October 22

From the CEA Chair

Christina Romer discusses the economic crisis, the policy response, and the outlook for the future.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”
Page 657 “Bank Runs and the Money Supply”
Pages 664-676 “The Classical Theory of Inflation”
Chapter 33 “Aggregate Demand and Aggregate Supply”
Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”
Chapter 35 “The Short-Run Trade-off between Inflation and Unemployment”
Chapter 36 “Five Debates over Macroeconomic Policy”

Chapter 30: Money Growth and Inflation
Archived Posts

 

July 21

The Fed’s Exit Strategy

Ben Bernanke explains how the Fed plans to prevent inflation when the recovery takes hold.

Textbook References:

Chapter 29 “The Monetary System”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


June 18

Deflation?

A graph shows that there has been deflation over the past year, as measured by the CPI. Yet when measured by the median CPI, there has been low inflation.

Textbook References:

Chapter 24 “Measuring the Cost of Living”
Chapter 30 “Money Growth and Inflation”
Pages 746-9 “Why the Aggregate-Demand Curve Slopes Downward”


May 26

More on Negative Interest Rates

Glen Rudebusch of the San Francisco Fed says that to be consistent with the Fed’s past policy, the interest rate would have to be negative five percent by the end of this year.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


May 11

Negative Interest Rates

The city of Prien am Chiemsee in Bavaria, Germany, employs a local currency that implements one of Mankiw’s suggestions for creating negative interest rates.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


May 7

More on Negative Interest Rates

Former central banker Willem Buiter endorses the idea of negative interest rates.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


May 5

Inflation or Deflation?

There is a humorous video of a country song that describes the debate about whether we are in danger of deflation or hyperinflation.

Textbook References:

Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”


May 4

Meltzer vs Krugman

Allan Meltzer is worried that the Fed’s easy money policy will lead to inflation. He is also worried that the Fed has lost its independence. Paul Krugman is worried about falling wages and the possibility of deflation.

Textbook References:

Pages 392-399 “The Demand for Labor”
Pages 399-400 “The Supply of Labor”
Pages 400-405 “Equilibrium in the Labor Market”
Pages 414-422 “Some Determinants of Equilibrium Wages”
Pages 648-649 “The Federal Reserve System”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”


Apr. 28

Fed Staff goes Negative

A Fed report says that the ideal interest rate now would be negative 5 percent.

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Apr. 27

Instantaneous Deflation as a Macro Solution

Robert Murphy responds to Mankiw’s argument that we need negative interest rates. He points out that Mankiw’s argument for future inflation is logically equivalent to an instantaneous collapse of prices. Mankiw points out that if prices are sticky, that can’t happen.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 755-760 “Why the Aggregate-Supply Curve Slopes Upward in the Short Run”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Apr. 22

More on Negative Interest Rates

Mankiw continues the discussion he started on April 18 about the usefulness of negative interest rates.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”


Apr. 19

Observations on Negative Interest Rates

Mankiw responds to comments about his April 18 post in favor of negative interest rates.

Textbook References:

Pages 539-541 “Real and Nominal Interest Rates”
Chapter 30 “Money Growth and Inflation”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?

A Quick Quiz

Take a quiz made up of questions from past AP tests.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-offs”
Chapter 12 “The Design of the Tax System”
Pages 589-593 “Policy 3: Government Budget Deficits”
Page 614-619 “How is Unemployment Measured?”
Pages 649-653 “Banks and the Money Supply”
Pages 653-656 “The Fed’s Tools of Monetary Control”
Chapter 30 “Money Growth and Inflation”
Pages 742-744 “The Assumptions of Classical Economics”
Pages 749-751 “Why the Aggregate–Demand Curve Might Shift”
Pages 753-755 “Why the Long–Run Aggregate–Supply Curve Might Shift”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Apr. 14

Hall and Woodward on Fed Policy

Robert Hall and Susan Woodward argue that the large increase in bank reserves need not lead to inflation if the Fed adjusts the interest rate paid on reserves properly.

Textbook References:

Chapter 29 “The Monetary System”
Chapter 30 “Money Growth and Inflation”


Feb. 13

Irving Fisher

There is a link to a story from The Economist about Irving Fisher. It suggests that Fisher’s ideas, especially about debt deflation, are relevant today.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”

Pages 674-676 “The Fisher Effect”

Page 821 “Bernanke’s Challenges”


Feb. 11

Deflation Fears Subside

Mankiw presents a graph of bond yields that suggests deflation has become less likely.

Textbook References:

Pages 682-683 “The Wizard of Oz and the Free-Silver Debate”
Pages 835-838 “Should the Central Bank Aim for Zero Inflation?”


Jan. 13

There is a link to an editorial by Greg Ip that considers the probability of the U.S. government defaulting on its debt.

Textbook References:

Pages 576-577 “The Bond Market”
Pages 591-593 “The History of U.S. Government Debt”
Pages 673-674 “The Inflation Tax”

Dec. 5

Deflation Alert

Mankiw suggests that deflation has become more likely.

Textbook Reference:

Pages 682-683 “The Wizard of Oz and the Free-Silver Debate”
Pages 835-838 “Should the Central Bank Aim for Zero Inflation?”


Dec. 4

The Case for Inflation

There is a link to an article by Ken Rogoff that argues in favor of more inflation. More inflation would reduce the real value of debt.

Textbook References:

Page 682 “A Special Cost of Unexpected Inflation: Arbitrary Redistributions of Wealth”
Chapter 35 “The Short-Run Trade-off between Inflation and Unemployment”