pbousquet.bsky.social
Econ PhD @ UVA | mostly sharing macro research from twitter until people are more active here | pbousquet.com
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So I would say your points are not unique to the new HA literature but a broader need to be cautious about linearization in general. But also reasonable to think that e.g., certainty equivalence matters more here. Hopefully deep learning will open up paths to feasible nonlinear solutions!
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Thanks for the post; I hope discussions like this become more common!
My read of the SSJ paper: accuracy concerns are at least not exacerbated. Their achieve ~identical IRFs to Reiter (and Smets-Wouters when applied to RA case). Section 6 describes how to get "nonlinear perfect foresight" IRFs
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www.mikkelpm.com/files/lp_var...
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Hi Galo, I added you to the macro&monetary starter pack go.bsky.app/33aE55c
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(end of what Joe wrote)
I will just say that I have seen lots of discussions on twitter where I have to restrain mysellf from plugging his paper (e.g., x.com/HannoLustig/...)
Joe's a great guy and advocate and any department/place would be lucky to land him! [12/12]
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Broader lesson: Neither extreme is ideal - we want intermediate fiscal-monetary political power that aligns with economic conditions, including debt levels. Maintaining an independent central bank provides a way to achieve this outcome 👏👏 [11/12]
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Key finding 🔑: Large government indebtedness makes surprise inflation a more effective financing tool, yet inflation harms households equally in both high- and low-debt economies. First-best fiscal power rises with government indebtedness. [10/12]
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The 1970s featured too much fiscal power ⬆️ compared to welfare-maximizing levels. Post-2008, fiscal power has been too low ⬇️ compared to first-best. Even the post-COVID inflation surge represented less-than-optimal inflation. Why? [9/12]
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Post-COVID fiscal bargaining power was 10x higher than post-GFC levels. This helps explain why we saw 6.2% inflation after COVID vs just 1.8% after GFC, despite large fiscal stimulus in both crises. [8/12]
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External validation 👍: The model's implied fiscal power closely tracks data on hours Presidents spent meeting with Fed officials 🤝 from Dreschel (2024)! Fortunately, power can be measured even after hours data end in 2008. [7/12]
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This bargaining approach lets us quantify power dynamics that were previously difficult to measure. US fiscal power rose 📈 in the 60s and fell 📉 in the 80s, and spiked again 📈 after COVID. [6/12]
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A key theoretical result 📜: optimal outcomes require the Fed to have significantly more bargaining power than the Treasury. Of course, a prerequisite for a strong central bank is an independent one. [5/12]
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Institutional strength 💪: Do we inflate debt away or repay it using tax revenue? It depends who has more political clout. Relative institutional bargaining power determines how the govt. is financed. Strong Treasury → high inflation, strong Fed → high taxes. [4/12]
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We can model the Fed & Treasury as playing a game, each concerned with minimizing their own policy outcomes' costs (taxes for the Treasury, inflation for the Fed) and pushing 🏛️ financing to the other. The less constrained one is, the more constrained the other must be. [3/12]
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Distortionary taxation and surprise inflation finance government spending. What determines this mix? Households dislike both, but the political costs of high taxes fall on FP, while those of high inflation fall on MP. [2/12]
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Joe is not on here so I will be reproducing his twitter thread (x.com/JoeReedAnder...)
Joe's Website: www.joe-anderson.com
JMP: raw.githack.com/joe-anderson...
[1/12]
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Paper: www.mikkelpm.com/files/nonlin...
Code: github.com/mikkelpm/non...
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x.com/NunoGalo/sta...