After the 240 months I somehow ended with GDP 442999 and 1.53% inflation.
How come? Shouldn't I have a runaway inflation?
Another view from the neoclassical school has a similar conclusion dubbed the Policy Ineffectiveness Proposition.
But others say Fed policy does matter because in the real world contracts and prices are sticky.
https://en.wikipedia.org/wiki/Policy-ineffectiveness_proposi...
Low rates causes higher private lending, borrowing creates money (fractional reserve banking). QE also creates money by Federal Reserve buying Treasury's bonds with printed dollars.
Both of these are temporary, but we have had QE and low rates for over a decade now. QE was supposed to be unwound in 2018, but covid pushed it to new peaks.
Creditworthy demand for loans doesn't magically increase when rates change or the Fed buys bonds.
In QE, like with accounting, you debit one side and credit the other. Netting to zero.
The effects it all has probably are real in terms of steering where people park their money. And that matters in the long run.
But that would mainly amplify whatever underlying incentive structures exist for investment.
If you steer people to stocks, and the economy has only ponzi schemes to offer, it might be because they haven't figured out a policy framework that promotes actual production.
But you can't magically add production by rewriting the knobs so that they all go to 11. Printing is differently zero sum, but the analogy works there as well.
Somebody doing a cash out refi for 100k to add an extension to their house can certainly be inflationary
I will have to think about this.
This is fundamentally untrue. Projects that don’t make economic sense at a high discount rate do at a lower one. This is measurable with mortgages [1], alongside side a host of other cases.
[1] https://app.oarklibrary.com/file/2/f047273e-32ba-40f7-9b83-5...
Mortgages are one of the most annoying things to analyze in the economy, up there with healthcare, because of how much it is dominated by the government.
In the US a bank first makes a home loan, and then later gets money from the overnight market to cover the loan... likely from the Fed. They immediately sell the loan to Fannie and Freddie, GSEs that have actually been in conservatorship by the government directly since 2008. And every part of the market is protected and micromanaged and tax advantaged to oblivion. And every bank too big to fail, and loaded up with TARP funds and their bonds bought via QE.
Apply the principles of supply and demand to that, I dare you.
Businesses carry a lot of debt too, and can refinance lower and borrow more. Compare private sector debt levels today vs the 80s
Just because businesses can afford more debt, doesn't mean banks are going to give it to them. This is flawed logic.
Money and debt is like matter and anti matter. They both emerge from nothing when separated and disappear into nothing when they come into contact.
In any case, it is not the case here as private banks and bonds do not exist.
>The inverse happens with negative interest rates. If the central bank makes a loss on a loan, people are taxed to make the central bank whole in a kind of reverse seigniorage. Now in the real world this doesn’t tend to happen.
>It's difficult to create hyperinflation in SimCB (unless in the aftermath of high unemployment leading to low market inventory), when you lower interest rates, even to negative rates, the central bank takes a loss and you get reverse seigniorage, people's money is automatically taxed away, which offsets the inflationary effects of low interest rates and the system self stabilizes. This is partially due to there not being government debt to help fuel high inflation. I don't know how well this reflects real world economics.
>The other aspect that is missing from SimCB which could cause hyperinflation is the option for people in an economy to switch to another currency.
>(…) Now I could still have allowed central bank losses in SimCB's model. This might have made sense especially given that SimCB doesn't have a government to amplify central bank moves by borrowing. Central banks taking a loss, instead of taxing reverse seigniorage, might have simulated government stimulus, allowing the negative interests to act as little helicopter drops of money. Real world governments often borrow and spend during conditions that warrant very low rates (or under any other conditions really) to help put money into circulation. Something to try in a future version.
Edit: I guess it's not as fair to the player, but maybe there should be more randomness in there, or perhaps some kind of forcing function that makes things a bit less stable.
Central banks do QE to increase total bank reserves which is an ugly bandaid for not having to cut interest rates below zero. Inflation then allows real interest rates to be negative. Inflation isn't the same for everyone though, resulting in unfair wealth transfers.
I assume it needs a bit of a tweak for negative inflations, or is limited by the events being fixed - 'people spend 12% less' is more likely to happen at higher interest rates for example. And in particular if we weren't leaving it fixed but had only just lowered it, (i.e. increased motivation to spend) that wouldn't really make sense.
If prices are falling fast enough, a negative nominal interest rate is still a positive real interest rate.
Started with 0.25% and when the random events happened, adjusted rate really fast to get inflation to no more than 1% for ~6ticks