In this post I discuss the KR result but also point out a puzzle. If in the future the ZLB will often prevent the Fed from providing sufficient stimulus, then, on average, inflation should be expected to fall short of the Fed’s 2 percent target—a point shown clearly by KR’s simulations. The puzzle is that neither market participants nor professional forecasters appear to expect such an inflation shortfall. Why not? There are various possibilities, but it could be that markets and forecasters simply have confidence that the Fed will develop policy approaches to overcome the ZLB problem. It will be up to the Fed to prove worthy of that confidence.Can't bet the defaults without inside information by construction. Unless, of course, we live in a multi currency world.
In the multi-currency world we never see a member bank get so far put of balance, by construction. Balance is a prior, enforced agreement on variance bounds in the currency issuance. So, by construction, defaults end to follow the free entry and exit rule. Exit and entry disruption is no better or worse than any other price variance.
The mix up between Ben and the sandbox is a kind of theory and semantic. Ben measures a price index which follows a long term stable trend. Then that is called inflation. In the sandbox, inflation is currency issuance by bit error losses and everything else is a semi-repeatable pricing sequence. Pricing sequences, being a known variance, get rapidly set to balance by double entry accounting. This is a non-stationary process and done on an ongoing basis. We carry price insurance, we set prices. Everyone carries bit error losses, in proportion to the even bet.
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