Macromania sustainable deficits gas laws


There’s been much welcome discussion of late concerning the sustainability of government budget deficits and whether the size of the public gas definition wikipedia debt is anything to worry about. I’m not going to answer this question for you here today. But what I would like to do is describe a framework that economists frequently employ to help organize their thinking on the matter. I want to begin with some simple arithmetic and then move on to a bit of theory. I’ll let you judge whether the framework has any merit.

In words, the left-hand-side (LHS) of the identity measures the money needed to pay for government spending G(t) and the interest expense of the debt [R(t-1) – 1]*D(t-1), where [R(t-1) – 1] denotes the net nominal interest rate. The right-hand-side (RHS) of the identity measures the money collected by the government in the form of taxes T(t) and types of electricity generation the money created through new nominal debt issuance [D(t) – D(t-1)].

Assuming d 0, the identity [4] tells us that a sustained primary deficit is possible only if R n. In the standard DSGE model (which abstracts from financial market frictions), the real interest rate R/n is pinned down by time-preference and productivity growth. This real interest rate is typically estimated to be a positive number. If this is the view one adopts, then condition [4] implies that budget deficits cannot be sustained into the indefinite future. It’s not exactly made clear what might happen if deficit finance persists in such a case — maybe inflation and/or default. Bond vigilantes. Something like that.

Secondly, the standard DSGE model ignores the role static electricity human body that U.S. Treasury debt plays as an exchange medium in financial markets. The growth in the demand for Treasury debt has come from many sources over the past few decades. It is used extensively as collateral in credit-derivative and repo markets. Foreign countries have clamored to accumulate U.S. Treasuries as a store of value. Its demand was further enhance as a flight to safety asset during the financial crisis. And more recently, changes in financial regulations (Dodd-Frank and Basel III) have further spurred the demand for Treasuries (for example, they can be used to satisfy the Basel III liquidity-coverage-ratio requirement for banks).

Because of the special role played by nominally safe government debt in financial markets, it can trade at a premium. That is, agents and agencies are willing electricity grid australia to hold monetary objects for reasons other than their pecuniary rate of return. This is why the nominal (and real) interest rate on safe government securities can be set lower than the natural rate of interest. If R n, then the RHS of [4] corresponds to seigniorage revenue. (Note: seigniorage is not limited to the purchasing power created by zero-interest cash.)

Some of this discussion seems related to what the MMT folks are talking about. I’m not an expert in that area (am still reading up on it), but see, for gas up example, Scott Fullwiler’s article: The Debt Ratio and Sustainable Macroeconomic Policy. There’s also this nice piece by (the more mainstream) Neil Mehrotra: Debt Sustainability in a Low Interest Rate World and, of course, Olivier Blanchard’s AEA Presidential Address: Public Debt and Low Interest Rates.

Are there limits to how large a sustainable deficit might electricity usage calculator kwh be? To answer this question, we need to go beyond the identities described above. Here’s a simple theoretical restriction: Assume that the demand for real debt d is increasing in its real yield R/n. In undergraduate money-macro textbooks, we might say assume that the demand for money is increasing in the interest rate paid on money. Note that for a given nominal interest rate R, this implies that the demand for real money balances is decreasing in the (expected) inflation rate. Let’s denote this theory of money demand by the behavioral equation:

The answer to this question has a standard Laffer curve property to it. Increasing R (or decreasing n) is bad because doing so increases the interest expense of the debt. On the other hand, it increases the demand for debt. Think of [1 – R/n] as the tax rate and L(R/n) as the tax base. Increasing R/n has competing effects. So, for example, increasing physics c electricity and magnetism study guide n has the effect of increasing the inflation tax rate. This is good for revenue purposes. But it also has the effect of decreasing the tax base (as people substitute out of government debt into competing securities). This is bad for revenue purposes. The revenue (primary deficit) maximizing interest/inflation rate equates these two margins. In short, economic electricity trading behavior places a restriction on how much the government can finance its operations through money/debt issuance.

This is a very simple theory and it can be extended in many different and interesting ways. But the point of this blog post was first, to demonstrate how government budget identities can be combined with economic theory to form a meaningful government budget constraint and second, to demonstrate that there’s nothing necessarily wrong or unsustainable about a government running a persistent budget deficit.

Nick points out that grade 6 electricity unit in the OLG model, the introduction of (say) land eliminates the possibility that R n in equiilbrium. This is true only if government debt serves only as a store of value. My paper with Fernando Martin uses a standard macro model where debt has a liquidity role and coexists with a higher yielding alternative asset. It also has a diagram like Nick’s (Figure 1).

A final thought. One often hears MMTers say something like we replace the government budget constraint with an inflation constraint. I interpret this statement in the following way. Imagine setting the nominal interest rate to its lower bound R = 1 (I actually think it can go lower). Then the real rate of return on government debt (zero-interest money) is 1/n. If the real GDP is constant, then n represents the equilibrium inflation rate (in a model where we impose the additional market-clearing restriction). Assuming we are on the LHS of the Laffer curve, increasing the inflation rate increases the primary deficit. An inflation constraint n n* then limits electricity jeopardy 4th grade how large the primary deficit can be.

FTPL gives you the ‘inflation constraint’ part of MMT. Cochrane always says that the intertemporal government budget is not a constraint but a valuation equation that defines the equilibrium value of nominal government liabilities. (FTPL can also deliver some other things MMT people sometimes claim, e.g. that higher nominal interest rates can be expansionary due to income effects. See the discussion in Leeper gas in babies that breastfeed and Keith’s handbook chapter on the FTPL. By I don’t think this is really central to MMT’s theory of inflation determination. Another thing I think is not really central is the distinction between interest-bearing debt and ‘cash,’ which was mentioned by Blanchard in his recent tweet on MMT.)

Under the FTPL, increases in nominal government liabilities that are not accompanied by the promise of higher future real surpluses are inflationary and generate no real government gas water heater reviews 2012 revenue. The second building block — permanent output gaps — opens the door for the increase in nominal liabilities to raise future surpluses by closing the output gap and thereby increasing tax revenues at given tax rates. Cochrane’s 2005 JME paper ‘Money as Stock’ sort of anticipates this possibility; see the bottom of pp. 521. But in his case it is just a cyclical thing. The MMT people think fiscal policy can be used to close output gaps that would have no tendency to close ‘naturally,’ and that this will not lead to inflation. I think that can only be true if the output gains deliver sufficient increases in the path of real surpluses. Reply Delete

Your logic in your post is impeccable, of course. I have a couple of observations. First on the data electricity cost nyc, the periods when nominal income growth has exceeded R in your chart are either when inflation was rising (unexpectedly) and the post-crisis period. So I dont think that is sustainable. Second, your discussion of the value of Treasuries as a safe asset ignores the ability of the private sector to create it’s own safe assets as substitutes. Indeed, that was the whole problem in the ‘wholesale deposit’ market in 2007 in some people’s view. Now lots of people would say that the government should therefore flood the world with govt safe assets. If that debt was being used to buy igas energy shares or finance revenue generating assets, that’s fine. So I am not opposed to the infrastructure argument people advance, in principle. But I don’t think govt is that disciplined; I’d welcome being proven wrong. Finally, I would say that your analysis, while totally solid, ignores risk in the broad sense of that term. Optimal public finance does say that one should treat conventional taxes and the inflation tax symmetrically in the sense that the marginal social costs of the two should be equalized. I just think that a country that 4 gases in the atmosphere besides oxygen and nitrogen shows it is willing to use the inflation tax will face a risk premium that it won’t like, ex post. I dont think it is an accident that the countries that have used the inflation tax are countries that have had tax compliance issues (or have fought unfunded wars). I hope that helps because it’s late here and I’m done for the day. Reply Delete