The Fisher-Friedman-Sumner-Svensson axis

Here is Scott Sumner in 2009:

“People like Irving Fisher had a perfectly good macro model.  Indeed, except for Ratex it’s basically the model that I use in all my research.  But the problem is that these pre-1936 models didn’t use Keynesian language.  And they didn’t obsess about trying to develop a general equilibrium framework. A GE framework is not able to predict any better than Fisher’s models, and is not able to offer more cogent policy advice than Fisher’s model.  Indeed in many ways Fisher’s “compensated dollar plan” was far superior to the monetary policy the Fed actually implemented last October.  (Although I would prefer CPI futures target to a flexible gold price, at least Fisher’s plan had a nominal anchor.)”

I used to think of that Scott mostly was influenced by his old teacher Milton Friedman, but I increasingly think that Scott is mostly influenced by Irving Fisher.

Well of course this is not really important and Friedman undoubtedly was hugely influenced by Irving Fisher. Fisher’s influence on Friedman is excellently explained in a paper by Bordo and Rockoff from earlier this year,

Here is the abstract:

“This paper examines the influence of Irving Fisher’s writings on Milton Friedman’s work in monetary economics. We focus first on Fisher’s influences in monetary theory (the quantity theory of money, the Fisher effect, Gibson’s Paradox, the monetary theory of business cycles, and the Phillips Curve, and empirics, e.g. distributed lags.). Then we discuss Fisher and Friedman’s views on monetary policy and various schemes for monetary reform (the k% rule, freezing the monetary base, the compensated dollar, a mandate for price stability, 100% reserve money, and stamped money.) Assessing the influence of an earlier economist’s writings on that of later scholars is a challenge. As a science progresses the views of its earlier pioneers are absorbed in the weltanschauung. Fisher’s Purchasing Power of Money as well as the work of Pigou and Marshall were the basic building blocks for later students of monetary economics. Thus, the Chicago School of the 1930s absorbed Fisher’s approach, and Friedman learned from them. However, in some salient aspects of Friedman’s work we can clearly detect a major direct influence of Fisher’s writings on Friedman’s. Thus, for example with the buildup of inflation in the 1960s Friedman adopted the Fisher effect and Fisher’s empirical approach to inflationary expectations into his analysis. Thus, Fisher’s influence on Friedman was both indirect through the Chicago School and direct. Regardless of the weight attached to the two influences, Fisher’ impact on Friedman was profound.”

I wonder if Bordo and Rockoff would ever write a paper about Fisher’s influence on Sumner…or maybe Scott will write it himself? I especially find Scott’s “link” to the compensated dollar plan intriguing as I fundamentally think that Scott’s intellectual love affair with “Market Keynesian” Lars E. O. Svensson has to be tracked back to exactly this plan.

PS I am intrigued by the compensated dollar plan (CDP) and I increasingly think that variations of the CDP could be a fitting monetary policy set-up for Emerging Markets and small open economies with underdeveloped financial markets. One day I might get my act together and write a post on that topic.





Bank of Canada is effectively targeting the price level

Last week the Bank of Canada and Canadian government announced – not overly surprising – that it will continue its 2% inflation targeting regime.

This is a slight disappointment to Market Monetarists, but that said maybe the BoC is not really having a inflation targeting. In fact research show that BoC effectively has been targeting the price level rather than inflation.

This at least is the conclusion in a IMF paper from 2008. Here is the abstract:

“One of the pioneers of inflation targeting (IT), the Bank of Canada is now considering a possibility of switching to price-level-path targeting (PLPT), where past deviations of inflation from the target would have to be offset in the future, bringing the price level back to a predetermined path. This paper draws attention to the fact that the price level in Canada has strayed little from the path implied by the two percent inflation target since its introduction in December 1994, and has tended to revert to that path after temporary deviations. Econometric analysis using Bayesian estimation suggests that a low probability can be assigned to explaining this behavior by sheer luck manifesting itself in mutually offsetting shocks. Much more plausible is the assumption that inflation expectations and interest rates are determined in a way that is consistent with an element of PLPT. This suggests that the difference between IT as it is actually practiced (or perceived) and PLPT may be less stark than what pure theoretical constructs posit, and that the transition to a full- fledged PLPT regime will likely be considerably easier than what was previously thought. The paper also shows that inflation expectations are a major driver of actual inflation in Canada, which makes it easier to keep inflation close to the target without large output costs.”

HT Jens Pedersen

Reuter’s Hayek vs Keynes debate

See the Reuters debate on Hayek vs Keynes.

This concept is a great idea. I would love to see a Cassel vs Hayek debate or a Cassel vs Keynes debate.

HT Michał Gamrot

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