Notes on relative elasticity

These are coments in this paper posted by Econobrowser.

The paper is important because it breaks down inflation into relative inflation of one good to another. I got through my first read of the paper, and I get the gist of how he derived his result. I need another two reads, but here I go.

The best way to understand the result is to think of the economy as a series of production chains, commodities going in the top of a chain and consumer goods emitted from thebottom.
The next part of the framework is to consider liquidity (money) as just another good at each level of the chain.
Now, each vertex in the chain seeks to adjust a finite vector of goods (including liquidity) such that the distribution of elasticities is smooth and bell shaped. This result is in conformance with Hayek's minimization of transactions, and yields, at equilibrium, a Gaussian output of random noise. That is, there is no discernable bottlenecks at equilibrium, and the economies of scale yield maximum output for minimum input.
Given this framework we can hypothesize the effect of a positive productivity shock at some mid-point in the chain. The effect of better production methods in the middle of the chain is to pass elasticity down the chain to the consumer for a segment of goods; and pass inelasticity up the chain for a segment on inputs. Hence, initially, up the chain there is a distortion in the distribution of elasticities, and a complementary distortion down the chain. These distortions must be equilibriated out of the system over time, and during each step of equilibriation the distribution of elasticities at each vertex vibrates.

Under this formulation, then, the authors discovered that liquidity makes up about 10-15% of the vector of elasticities. But, overall, there is no such thing as monetary inflation in the sense of Uncle Milt. There may be productivity shocks in the financial sector, but these shocks, like all other shocks simply travel up and down the system settling over time in complementary fashion. At equilibrium, regardless of the shock the system always reverts to the same distribution (or tries to) at each level of the system.
What we see as inflation at one level must always be counter balanced by deflation at another level.
Uncle Milt was getting to this theory with his plucking theorem.

The framework I have outlined let's us discuss instability theorems by examining the possibility of equilibrium along the supply chain. I note that each input to a given vertes attempts to be a spectrally deficient white noise. But each vertex also attempts to combine its incident arcs into a gaussian distribution. However, by construction, a Gaussian white noise has no slope, it is spectrally deficient. Hence, there is no solution at equilibrium though all vertices try to achieve it in their collective actions. The best that can be had is to minimize the variations off of Gaussian such that the total variance of the economy has minimal spectral components.