Recent posts have talked about zero bound and inflation rates. We cannot cure some symptoms with inflation. Here is why.
The welfare function of the firm or household is optimum when common mode price changes are hedged with long term assets.
For example, house prices are a hedge against inflation. The more we predict inflation the more we invest in housing. Hence, when oil became constrained, oil inflation was reflected in house prices.
Looking at orthogonalization we can see that as square intagrable systems trend toward equilibrium, the terms along any yield curve will decorrelate, moving common mode signals to the right, toward long term inventory.
Spectral characteristics, important in constrained systems. Global oil distribution determines our inflation rate, not an aggregate basket, because we are constrained by a single, essential good. So the assets/liability sheets of OPEC countries are optimum at zero inflation.
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