インフレサイクルの管理における金融政策と財政政策の限界 | Patreon

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Using the Q-MESSSI Model

When it comes to macroeconomic stabilization, the tools of monetary and fiscal policy have long been at the forefront of the debate. As we can see from the inflation simulations comparing a 0% interest rate policy with a more elevated one, there are important insights that underscore the complexity of fighting inflation, especially in times of economic uncertainty.

The chart presented compares two paths for inflation: one under a stable, lower interest rate policy and another under a custom scenario where monetary policy became more aggressive. In this case, we assume 10 distinct changes to the Fed Funds rate — five aggressive hikes of 100 basis points, followed by five equally aggressive cuts. This represents a significant shift from an initial peak of 5% back down to 0%.

In this analysis, I'm employing the Q-MESSSI model, which stands for Qualitative Macro Economic System State Simulator. The model allows for a nuanced look at how qualitative shifts in macroeconomic variables—such as inflation, interest rates, and public debt levels—affect the overall economic landscape. One of the strengths of the Q-MESSSI model is its ability to simulate non-linear reactions across different stages of the business cycle. It reveals how interventions in the economy, particularly through monetary and fiscal policy, interact with endogenous forces in the system.

The Q-MESSSI model is particularly adept at simulating not just quantitative changes but also state transitions in the economy, where political and market behaviors change based on shifting economic realities. Through this lens, the model illustrates the ineffectiveness of monetary policy in managing short-term inflation surges and captures the lagging impacts of fiscal policy interventions. These insights shed light on why, even under the best circumstances, short-run policy moves may fall short of controlling inflation or stabilizing growth.

Short-Term Ineffectiveness of Monetary Policy

Even when monetary policy is implemented with precision in reaction to an inflation spike (or "inflation pulse"), its short-run effectiveness is quite limited. This simulation illustrates that while inflation responds to these large interest rate adjustments, it is not an immediate cure. Inflation continues to climb before it eventually peaks and declines. What this tells us is that the lag effect of monetary policy cannot be overlooked. Even when policymakers execute swift and extreme rate changes, the inflationary pressures often persist before easing off.

The first five rate moves in the simulation were aggressive, with 100 basis point increments up to a peak of 5%. However, the declining part of the curve following these extreme moves, although lowering inflation, illustrates that inflation persists for a time before coming down, showing the natural inertia within the economy.

In an economic environment with higher public debt levels, this lag effect may be even more pronounced. Here, monetary policy faces constraints, as higher debt levels may induce more sensitivity in market participants or erode confidence in monetary tightening policies.

Figure 1: Output for the Q-MESSSI model showing a slight decline in inflation after a 500 basis point increase of 6 months for the policy rate

Could More Extreme Measures Work?

One might argue that the Fed could have implemented even more drastic measures, such as 500 basis point moves, peaking interest rates at an extreme 25%. However, the economic fallout from such policies would likely result in significant harm to employment. These extreme monetary policies, while possibly having a more rapid impact on inflation, would almost certainly induce a sharp contraction in employment, which would be politically unsustainable. A scenario like this could get a president or central banker "removed from office." as the economic costs would be so dire that they would be intolerable from a political perspective.

Fiscal Policy: Short-Term Ineffectiveness, Long-Term Power

While monetary policy can be relatively quick in its implementation (as central banks can meet and change interest rates as often as necessary), fiscal policy suffers from an even greater short-term lag. The political processes that dictate fiscal policy (budget debates, legislation drafting, and implementation) mean that fiscal interventions generally take longer to have a material impact on the economy. However, fiscal policy can be far more effective over the long term than monetary policy, especially when well-targeted at improving infrastructure, education, or technology.

But why is fiscal policy less effective in the short term? The political lag channel, as the model suggests, plays a crucial role. There are procedural delays in implementing fiscal policy changes, and by the time they take effect, the business cycle may have already progressed beyond the intended intervention. Once the business cycle is in motion, it tends to follow its course. This includes the natural inflationary surge, which we observe in virtually all economic cycles, regardless of how small or large the cycles are.

Are Policy Interventions Futile Once the Cycle Begins?

A key takeaway from this analysis is the idea that once the business cycle begins, barring some extreme exogenous shock, nothing is likely to stop it. The endogenous inflationary pressures that arise during economic expansions appear to be a natural part of the cycle. This insight aligns with observations from real-world data and history, where inflation tends to increase during periods of growth, even in cases where monetary policy is implemented with perfect timing.

In this context, we might reconsider Keynes's famous quote, "In the long run, we are all dead." Perhaps it holds a deeper significance here. While short-term policy tools may seem impotent against the business cycle, long-term policy planning—particularly well-crafted fiscal policies—takes time to fully materialize and make a meaningful impact. This means that by the time these policies do make their full impact, the immediate crisis may have long passed. However, their effects linger on in improving the economic resilience in the long term.

The limits of both monetary and fiscal policy, as illustrated by this simulation and modeled in the Q-MESSSI system, are important to recognize. In the short term, monetary policy is constrained by lag effects, while fiscal policy suffers from political delays. Once the business cycle has started, there's little that policymakers can do to halt its progression. However, long-term fiscal policy, when properly executed, can be far more effective than monetary policy in shaping the structural forces of the economy.

In times of inflation, as we can see from the simulation, central banks are faced with an impossible choice: act aggressively, but risk severe employment losses, or act conservatively and face prolonged inflation. Perhaps the lesson here is to recognize the inherent limitations of both fiscal and monetary policies and to craft economic strategies that are resilient to the inevitable ups and downs of the business cycle.

In essence, the path forward might be one of preparation rather than reaction, building long-term solutions that mitigate the next cycle rather than merely managing the current one.