Friday, April 17, 2015

Matthew Martin — The irrefutability of neo-fisherism


Not irrefutable if the direction of causality can be demonstrated in a compelling way. Instrumentalism (versus realism) does not differentiate direction of causality ontologically; it only establishes invariance of variables. 

Realists hold that without understanding causality ontologically, it isn't possible to know which variables are independent and which are dependent, since if they correlate, they can just be reversed. No problem is there is no difference, but it could be a big problem if there is a difference that the assumptions make it difficult or impossible to detect. So it is necessary to employ methodological assumptions that enable ontological differentiation in addition to formal analysis.

From the MMT vantage of changes in accounting balances, increasing interest rates adds to non-government net financial assets by increasing interest payments on government securities, which is potentially inflationary at full employment at the time the central bank uses monetary policy to address inflation. Here is a a causal argument for neo-fisherism. It has been advanced by Warren Mosler, for instance.

The counterargument is that raising interest rates not only increases interest payments on government securities but also increases the cost of capital, reducing borrowing for investment. The housing market is a major source of investment driving economies and investment in housing is sensitive to mortgage rates because it influences how much PITI a purchaser can afford to pay monthly.

So the result is something of a wash and how much of a wash depends on the actual context. 

Separating Hyperplanes

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