Another way to frame the Ex Ante vs Ex Post distinction is from decision making theory, where you should judge decisions not (only) by the outcome but by the process and assumptions with which the decision was made.
As for the fisher equation, neofisher interpretations do not rely on a fixed real rate. That is a common misconception.
In fact, conventional monetary policy requires "amplified transmission", that is, nominal rate changes must induce an even greater change to the real rate, to acheive deflation.
For example, if you raise nominal rates by 2%, and real rates increase 2%(perhaps from -1% to +1%), then no change to inflation happens. You in fact need a real rate change of 3%, in order to induce 1% deflation, when you increase nominal rates by 2%.
The long run nominal rate setting is in essence a "benchmark" for the real rate. the real rate must meet or exceed the nominal rate to have 0% inflation. If you are okay with 2% inflation, then the real rate must be within 2% of the nominal rate, to hit that target.
Thus the higher the nominal rate, the higher the real rate you need to hit your target.
The conventional view is justified on the premise that the real rate is accelerating, thus you need to correct the real rate before you can stabilize inflation. But if you raise rates too quickly, arguably you prevent inflation from correcting the price of an overvalued currency, ie the national debt is too big. Whereas if you wait sometime, the value of the national debt can correct downward, before you attempt to stabilize the real rate.
Conventional monetary theory is 100% based on the premise you need to correct real rates first, and immediately, but arguably there is a better way which involves waiting for inflation to mostly run its course before hiking rates, and that waiting is better because it doesn't lead to an explosion of interest on the national debt, until growth is poised to recover.
This is indeed the critique Stephen Williamson issued years ago. Although I don't really buy into the view that inflation can "run its course". I think if you look at money creation under the hood, you see why explosive dynamics are to be expected.
They're expected because it's equilibrium thinking. My substack is "ratedisparity" ie, non-equilibrium dynamics.
Money creation "under the hood" is monetizing or securitizing collateral at a given valuation. In other words, collateral appraisal defines the price level. So inflation happens when assets generally are appraised higher than they were previously, without a relative value increase.
So if the average home is appraised at $200k, and then a year later it's appraised at $400k, without an increase in relative scarcity, that is what sets the price level.
Interest as a definition of the price level, would be a circular definition. Moreover, a higher rate makes it cheaper to buy future money. A 10% rate means you can buy $110 in a year for $100 today. the higher the rate the cheaper it is to buy future money.
Inflation is no more prone to accelerate than drawdowns on any financial asset. What makes it appear accelerating is in fact lag, which means it takes longer for currency value to adjust than other market prices.
If Apple shares drop 50%, then that can continue or reverse, once it becomes a bargain buy. Or investors can lose confidence in the enterprise altogether, so it keeps dropping. Currencies are no different, which is why inflation can run its course.
If you try to stop inflation too early, that is like trying to defend a market valuation for a company. It is easier to defend a valuation at a lower price point. If you buy more shares to try to stop a fall in share price, you will run out of money if you pull the trigger too early.
Great post!
Another way to frame the Ex Ante vs Ex Post distinction is from decision making theory, where you should judge decisions not (only) by the outcome but by the process and assumptions with which the decision was made.
As for the fisher equation, neofisher interpretations do not rely on a fixed real rate. That is a common misconception.
In fact, conventional monetary policy requires "amplified transmission", that is, nominal rate changes must induce an even greater change to the real rate, to acheive deflation.
For example, if you raise nominal rates by 2%, and real rates increase 2%(perhaps from -1% to +1%), then no change to inflation happens. You in fact need a real rate change of 3%, in order to induce 1% deflation, when you increase nominal rates by 2%.
The long run nominal rate setting is in essence a "benchmark" for the real rate. the real rate must meet or exceed the nominal rate to have 0% inflation. If you are okay with 2% inflation, then the real rate must be within 2% of the nominal rate, to hit that target.
Thus the higher the nominal rate, the higher the real rate you need to hit your target.
The conventional view is justified on the premise that the real rate is accelerating, thus you need to correct the real rate before you can stabilize inflation. But if you raise rates too quickly, arguably you prevent inflation from correcting the price of an overvalued currency, ie the national debt is too big. Whereas if you wait sometime, the value of the national debt can correct downward, before you attempt to stabilize the real rate.
Conventional monetary theory is 100% based on the premise you need to correct real rates first, and immediately, but arguably there is a better way which involves waiting for inflation to mostly run its course before hiking rates, and that waiting is better because it doesn't lead to an explosion of interest on the national debt, until growth is poised to recover.
This is indeed the critique Stephen Williamson issued years ago. Although I don't really buy into the view that inflation can "run its course". I think if you look at money creation under the hood, you see why explosive dynamics are to be expected.
They're expected because it's equilibrium thinking. My substack is "ratedisparity" ie, non-equilibrium dynamics.
Money creation "under the hood" is monetizing or securitizing collateral at a given valuation. In other words, collateral appraisal defines the price level. So inflation happens when assets generally are appraised higher than they were previously, without a relative value increase.
So if the average home is appraised at $200k, and then a year later it's appraised at $400k, without an increase in relative scarcity, that is what sets the price level.
Interest as a definition of the price level, would be a circular definition. Moreover, a higher rate makes it cheaper to buy future money. A 10% rate means you can buy $110 in a year for $100 today. the higher the rate the cheaper it is to buy future money.
Inflation is no more prone to accelerate than drawdowns on any financial asset. What makes it appear accelerating is in fact lag, which means it takes longer for currency value to adjust than other market prices.
If Apple shares drop 50%, then that can continue or reverse, once it becomes a bargain buy. Or investors can lose confidence in the enterprise altogether, so it keeps dropping. Currencies are no different, which is why inflation can run its course.
If you try to stop inflation too early, that is like trying to defend a market valuation for a company. It is easier to defend a valuation at a lower price point. If you buy more shares to try to stop a fall in share price, you will run out of money if you pull the trigger too early.