Monday, May 07, 2012

In which I demonstrate that I can be very rude in comments at mainlymacro.blogspot.com even when I absolutely agre with Simon Wren-Lewis's conclusions.

Bravo indeed. I think you slightly understate your case. Yes we generally assume central banks affect only inflation, but we generally assume nonsense for simplicity. For example we generally assume one price level per currency, so we generally assume that there can not be a competitiveness problem within the Euro block (or UK or US and this is always false).

I guess that central banks affect inflation via interest rates -> investment - a Phillips curve of some sort > inflation.
The only affect average inflation follows from strong assumptions certainly including the assumption that the Phillips curve of some sort is linear. It isn't in any data. I just don't see how looser monetary policy is supposed to cause Spanish inflation to accelerate. If it is very hard to get negative inflation, as you correctly write, then uniform monetary policy with uniform risk premia will have different effects on countries that are vs are not stuck on the downward extreme nominal rigitity bound.

Also what happened to Kantoos? Is it the Zeitgeist or something in the German water system ?

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