Evening Must-Read: Nick Rowe Gets Tired of Whack-a-Mole…

…reality just confirmed that beloved economic theory. The Riksbank raised interest rates because it was scared that low interest rates would cause financial instability. Lars Svensson resigned in protest. Then inflation fell, and the Riksbank needed to cut interest rates even lower than before…. If you don’t know how to drive a car, and you don’t even have a clue whether you turn the steering wheel clockwise or counter-clockwise if you want to turn right, one good strategy is to borrow a car, and a wide open field, and experiment. Make a random turn of the wheel, and see what happens. The recent data point in Sweden was a natural experiment like that…. Theory says, and the data confirm, and the advice of experienced practitioners confirms, that if it wants to raise inflation the central bank should first lower interest rates. Then, when inflation and expected inflation starts to rise, it can raise interest rates, higher than they were before. Then, and only then, does the Fisher effect kick in…. That is the Scandinavian flick we saw recently… the wrong way round…. Figuring out the intuition behind John Cochrane’s paper, to see what was really going on in his model, really drained me. Do I really have to wade through that Stephanie Schmidt-Grohe and Martin Uribe paper too, and reverse-engineer their result as well? I’m too old for this. Don’t any of you young whippersnappers have an economic intuition? Do you all get snowed by every fancy-mathy paper that comes along? I expect I will have to. Pray for me.