Finance

Doesn’t This APPEAR TO BE The Austrian Business Cycle Theory?

It is great when a smart financial theorist like David Andolfatto requires a hard analytical look at nominal GDP targeting. His recent post grows an overlapping years model, considers expected productivity shocks to capital, and claim that nominal GDP targeting would provide no benefit–I think. However, when output is given and prices are properly flexible, nominal GDP targeting will likely have few benefits. That nominal GDP targeting provides few benefits in this model and would provide benefits in real life, where the output can change and prices (including wages) are sticky, should be no surprise also.

Anyway, supposedly young people expect their capital goods to be less effective when they may be old, so they prefer to create fewer of these and instead produce consumer goods to market to the old people and accumulate money/bonds. The amount of money is given, apparently, which means this creates deflation. The old people get extra consumer goods, and the teenagers get less overall per consumer good, with the prices they receive being lower. Next period Then, they will be in a position to spend the money/bonds on consumer goods produced by the next era.

It appears to me that this money for which they gave up more consumer goods will get them less consumer goods once the next generation’s determination to provide consumer goods profits to normal. However, I guess the real come back on capital is meant to be negative too. Andolfatto appears to identify the natural interest rate as the interest without the realization of the productivity shock.

I guess it might be the expected natural interest. Since there is no growth, it is meant to be zero. Therefore, if the surprise is zero, I quickly think a poor shock helps it be negative absolutely. Therefore we are equalizing that negative return on capital with a negative across generation transfer of consumer goods using money.

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Well, negative for the current young generation. The windfall for the old folks suggest they get a positive return on the money. From a market-monetarist perspective, the amount of money should rise. The young people want to carry more money, therefore more should be released, in trade for consumer goods presumably.

Obviously, the old folks have to get the consumer goods since no young person wants them. But the authorities are creating all the amount of money. So, how exactly does the government get the new money to old people? Suppose the government pays extra “interest” to the old customers, expanding the quantity of money. And gets it back by paying less interest to the present young people when these are old.

The old people buy more consumer goods, the young people get more money, but earn lower interest on the money/bonds. Given the assumption of zero curiosity about “normal” times, this would maintain positivity interest for the existing old folks and negative interest paid to current teenagers. I guess I just hardly understand.

It appears to me that to provide more to the present group of young people, fees must be increased on the next group of young people, making up for the unusually low productivity of capital this era. And I don’t see what this may possibly want to do with nominal GDP targeting.