What did Friedman say when he was asked whether governments created inflation? (Theoretical Advanced Macroeconomics)

Milton Friedman's view on government creating inflation

M. Friedman was born in 1912. When he was asked that whether government created inflation, he answered that the government create inflation in order to get the revenue from it, and the reason it has come down is not because the governments have become more noble but because we can't get much revenue out of it. 

He stresses he had given a talk to the Bank of Japan in 1985, on which he based the last chapter of his book 'Money Mischief (1992)'. He entitled it in a Monetary Policy in a Fiat World to quote,' Inflation has become less attractive as a political option. Given that the voting public is very sensitive to inflation, it may currently be politically profitable to establish the monetary arrangements that will make the present irredeemable paper standard and exception to Fisher's generalization'.

In Fisher's Purchasing power of money (1911) he says that every attempt at a paper, money standards has been a disaster. How do governments get money from inflation ? At first number there is the direct value of the high powered money base (H). That is a very small source, its trivial. much more important are two other sources. One is that if your tax system is expressed in the nominal terms, inflation raises taxes without any one having to vote for higher taxes. The second is that, if we have been able to issue securities at an interest rate that is lower than the rate of the inflation, we can expropriate those securities. The expropriation of past debt plus the automatic increases in taxes were undoubtedly the major source of revenue for the USA then from the inflation of the 1970's. 

There is no doubt about that, I remember having breakfast in some occasion with the then Senator Long from Louisiana was on the Finance committee. He said, you know we never could have passed these rate of tax on the current income if it hadn't been that they were automatically brought up there by inflation. It would have been politically impossible. The adjustment of the tax rates for inflation, indexing the tax rates, has eliminated one source of revenue. The fact that bond markets had become so much more sensitive to more inflation has eliminated the second. So how much revenue can you now get out from inflation? 

It is not worth inflating. If we have inflation in the future, my prediction is that it will only be as an attempt for full employment purposes and not as way to raise the revenue. That is why M. Friedman was am pretty confident that there will not be a major inflation in the future.

So, these were the verses by Friedman. We are wise enough to predict the rest. Rest is history. 

More coming, Keep reading my blogs.

Thank You

Aditya

 

Dr. Richard Werner and the Princes of the Yen (Economics of Money and Banking)

    Richard Werner and his Princes of the Yen

Richard Werner is that one of the economists who has pioneered in the empiricism where the hatchet was still to be dug out. He is the one who carried out the three major pre assumed tenets of the Banking theories and stated them into the empirical evidences and took out some of the amazing analysis out of it.

He firstly asked the people that can bank (commercial) individually create money out of nothing ? Prior to his research release, there were no any such researches that could really answer this big quandary. He sorted some of the literatures on whether banks can create money or not and he empirically tested and found out the results that were truly out of the arena.

Over there, he questioned the three theories of banking credit creation that we, general people  are more or less are aware of. The Credit creation Theory, The Fractional Reserve Theory and The Financial Intermediation Theory. He empirically conducted a survey on sync with these three theories withdrawing some of the money from the bank., that was some 200K Euros and then eventually he compared Bank Credit accounting according to the credit creation theory , credit accounting according to the Fractional Reserve Theory and the Credit accounting according to the Financial Intermediation Theory.

He kind of a like parted a collaboration with bank and inspected with the new bank account of him which was created in the name of his balances. He studied the complex structure of the real money formation and eventually discarded three of the stated theories and  reached to the conclusions that there a different channel, which maybe is simply unseen that creates money out of nothing.

        The Princes if the Yen

While Richard was in Japan, he had stated the Central Bank of Japan then with the upcoming recessions and to his word that even amazes me out is that, the Japanese folks stated that the boom and the bust cycles were created knowingly to lead an economy on the lash. From that statement it's also clear that central bank have the power to create the boom and bust cycles.

The Princes of the Yen is one of the book of Justice that I have read it so far. It explains who actually is the Princes of the Yen and what is the really outlook of then Japanese Economy and the role of central banking over there (there will be a book review kept after some days).

Thank You

Aditya Pokhrel

P.S Comments are lauded.

Some of the useful codes in R (Applied Econometrics with R)

  ■ Some codes in R

Note: Dep var = Dependent Variable.

           Ind var = Independent Variable.

           Var 1 = Variable 1

           Var 2 = Variable 2

a) Taking log values

lvar1 <- log(var1, base = 10)

b) Correlation Test

#install.packages (corTest)

library (corTest)

cor.test(var1, var2)

c) Unit Roots Test (without deseaonalisation)

# install.packages(fUnitRoots)

library(fUnitRoots)

d) Testing Unit Root at Level (ADF)

adfTest (lvar1, lags = 0, type = "c")

e) Taking 1st difference

d.var1 <-diff (var1)

f) Lag selection criteria

#install.packages (vars)

library (vars)

Say, 

kk <-cbind (lvar1, lvar2, ... lvarn)

VARselect (kk) $selection

g) Co Integration  (Johannessen)

Say,

JC1 <- ca.jo (kk, type = "trace", ecdet = "none", K =3)

h) Eigen Value Stat

JC1 <- ca.jo (kk, type = "eigen", ecdet = "none", k = 3)

i) VECM (in p - 1 lags)

Say, 

model1 = VECM (data.frame (vars), lag = n, r = m, estim = "ML")

where, r = no. of co integrating relationship (will discuss later)

j) Impulse Response Function

plot (irf (model1, n.ahead=10))

for 10 periods.

k) Multicollinearity in R

Packages are - car, faraway, VIF, fmsb, HH.

Say, 

#install.packages (faraway)

library (faraway)

model1 = lm (depvar~ind vars)

faraway : : vif (model1)

The result obtained should be less than 5.

l) Serial Correlation in R

Box.Test (var, lag = n, type = "Ljung-Box")

Box.Test (var, lag = n, type = "Box-Pierce")

Serial correlation if exist we can make the model into GARCH.

m) Heteroscedasticity in R

#install.packages (lmtest)

model1 = lm (var1~ var2)

bp test (model1) Breush Pagan test

n) Normality Test

Shapiro - Wilk test

Say a hypothetical test

c < - LC $ variable [1:n]

shapiro.test (c)

If the result p value is more than .05 then the data is normally distributed.

o) Ramsey Test

#install.packages (lmtest)

library (lmtest)

model1 = lm (var 1 ~ var 2)

resettest (model1)

Let's see the results, Ho: There's linearity in model.

If the p value is more than .05 then our null hypothesis is accepted then linearity in the model.

To be contd...

Aditya Pokhrel 

P.S Comments are lauded

Stochastic and Deterministic trend using R (Applied Econometrics)

Stochastic and Deterministic trend using R

Let’s say that there are two variables. The share price of Nepal Lever Ltd and there’s a NEPSE index. We will now identify whether the NEPSE index has a stochastic or a deterministic trend.

For this we have to install the packages and import the data as in .csv files (this data import is skipped over here).

For this: tseries would be the package.

Now, in R studio, it is

library(tseries)

attach(NepaLever)

nepse = NepaLever $ NEPSEINDEX

Now it is to be noted that if the time series has trend then its parameters may not be stable and remain same in the future and our forecast may not be correct.

Let’s plot.

plot.ts(nepse)

See the figure. If the trending variable change in an uncertain amount in each period (vt) say, then it is known as the stochastic trend.

Now, let’s see for deterministic trend

Say, there is the data named as “datsalesyear”

Now, In R,

library(tseries)

attach(datsalesyear)

plot.ts(datsalesyear)

After this, view the graph. If the change is constant then there’s a deterministic trend.

SOLUTION: If the series has a deterministic trend the solution is de trending.

         If the series has a stochastic trend the solution is re trending.

Note: More will be discussed on re trending and de trending on upcoming blogs.

Thank You

P.S Comments are lauded.

Aditya Pokhrel

What does GEPR (June 2021) highlight ? Here you go. (International Economics).

# Global Economic Prospects Report – June, 2021

 

1)      Global Economy is expected to expand by 5.6 % in the year 2021 (this is said to be the fastest post recession expansion in 80 years).

 

2)      The global output is expected to be below 2 % if it is compared with the pre-pandemic projections for the end of the year 2021.

 

3)      The economic growth of the U.S is expected to rise by 6.8 % in the year 2021 (this is due to the easing of the pandemic restrictions and large fiscal support).

 

4)      The economic growth of China is expected to rise by 8.5 % in the year 202 (due to the release of the pent-up demand).

Note: Pent up Demand is the condition where the demand for a product/service is unusually strong.

 

5)      Emerging markets and developing economies are expected to grow at 6 % in a year (due to the higher demand and elevated commodity prices).

 

6)      The economic growth of the East Asia and Pacific is projected to grow by 7.7 % in 2021 (5.3 % in 2022).

 

7)      The economic growth of the Europe and Central Asia is projected to grow by 3.9 % in 2021 (3.9 % in 2022).

 

8)      The economic growth of the Latin America and Caribbean is projected to grow by 5.2 % in 2021 (2.9 % in 2022).

 

9)      The economic growth of the Middle East and North Africa is projected to grow by 2.4 % in 2021 (3.5 % in 2022).

 

10)  The economic growth of the South Asia is projected to grow by 6.8 % in 2021 (6.8 % in 2022).

 

11)  The economic growth of the Sub Saharan Africa is projected to grow by 2.8 % in 2021 (3.3 % in 2022).

 

12)  The Per Capita Income of the many emerging and developing economies is also expected to remain below the pre-pandemic levels and the losses are expected to worsen the deprivations associated with health, education and living standards.

 

13)  The economic growth of the low-income economies in the year 2021 is expected to grow by a 2.9 % (2021) and 4.7 % (2022) (the growth in 2021 is said to be slowest in the past 20 years, partly reflecting the very slow pace of the vaccination).

 

14)  Trade costs will remain almost one-half higher in the emerging markets and developing economies than in the advanced economies, in a large part due to the higher shipping and logistics costs.

 

15)  The higher global inflation may complicate the policy choices of the emerging markets and the developing economies in up coming months as some of these economies still rely upon the expansionary support measures to ensure a durable recovery.

 

16)   The challenges related to the food insecurity in the low-income countries can rise due to the rising food prices and accelerating the aggregate inflation in the year 2021.

 

Thank You

Aditya Pokhrel

Heard ARDL many times, how about NARDL ? Here you go. (Applied Econometrics)

 NON LINEAR ARDL

Thank You

P.SComments are lauded.

What is Polynomial Regression when we see under a scenario between error and complexity of a model ? (Applied ML Econometrics)

Polynomial regression with avoidance of underfitting of the model.

Thank you