Ricardo Reis

On the fort: starforts.com/conception.html Fonte: a fantástica edição do @expresso desta semana.

In 1507-15, the Portuguese crown built the fort of Our Lady of the Conception in Hormuz, to control trade from India and charge hefty tolls to passing ships. From the outset, holding the fort and controlling the Strait of Hormuz required constant fighting with local emirs; by 1662 the Shah of Persia (backed by British forces) took it for good. After a detailed account of the back-and-forth in a fierce and bloody seven‑month naval battle in 1521–22 in the Strait of Hormuz, Commander Saturnino Monteiro, in the first volume of his treatise "Batalhas e Combates da Marinha Portuguesa,” concluded: "...and thus ended this stupid and useless war of Hormuz, with everything remaining as it had been before."

@helene_rey Congratulations! They are very lucky to have you.

Looking forward to this new chapter in a great organisation. What a daunting task to follow Hyun!

@Jon_Hartley_ has a nice overview of some of his main articles here. x.com/Jon_Hartley_/s… But for someone wanting to understand how Chris thought, I would recommend his Nobel lecture on his past achievements (nobelprize.org/prizes/economi…), his AEA presidential address on debates about how to think about inflation (aeaweb.org/articles?id=10…) and his discussion of empirical methodology in macro versus micro (aeaweb.org/articles?id=10…).

@R2Rsquared I'm currently reading "a crash course on crises". What would you say is the best paper to read by Sims for a student interested in macroeconomics?

R.I.P. Chris Sims. I have so many fond memories of our years together at Princeton and of so many joyful meetings over the years. As Markus wrote, he was a wonderful person: kind, generous, thoughtful. A small story: we co‑advised several PhD students. We had a system. Chris met them at 4pm, I met them at 5pm. They always walked into my office a bit stunned. Chris had shown them all the ways their drafts didn’t quite answer the question. I would then help them process his comments. By the end, the students were excited about all the avenues for progress that Chris had opened. Being Chris’ “interpreter” for our students was a great honor that I treasure to this day.

@channel_echo @scottlincicome See the paper in the sources

@R2Rsquared @scottlincicome How is “unexpected inflation contribution” defined? Ratio of actual price level vs expected? Or expected inflation rate minus actual inflation rate? (Same question for the x-axis.)

How much did public deficits contribute to the inflation surge of 2021-24? A popular argument notes that inflation rose in the US by almost as much as in other OECD countries. Yet, the US had a large fiscal stimulus in 2021 that most other countries did not. Therefore, the US fiscal stimulus did not contribute to the inflation surge. Is that right? No, it is not. To inspect this claim, you can use expectations data. By virtue of its mandate, the IMF is one of the best forecasters of fiscal variables and all economists pay attention to them. The IMF also forecasts inflation; during 2021-24, it was as right or as wrong as other institutions or surveys. Start from the IMF's forecasts in October of 2019 for the next 5 years of how much public debt would grow and what would be fiscal deficits, interest rates, inflation, and growth rates. Then look at the IMF April 2025 reports of those actual variables. Subtract one from the other and you have how much of the unexpected increase in public debt was due to unexpectedly high deficits, unexpectedly high interest rates, unexpectedly low growth rates and unexpectedly high inflation. The plot compares the unexpected high deficits with the unexpected high inflation terms for OECD countries, using the common units of their impact on the public debt. For countries that ran higher unexpected fiscal deficits, inflation was also unexpectedly higher. Some countries had their stimulus early, others only later. Somer larger, other smaller. Some had more, others less inflation. The accounts of the government let you consistently sum these differences over the 5 years to look beyond timings and to use consistent units. Thinking in terms of surprises and using expectations data allows you to compare countries with very different fiscal trajectories. More generally, in all models and theories of inflation, including fiscal account, expectations are crucial. Using expectations data to inspect them is very informative. Note: as with the initial claim, the plot is a correlation, not a causal statement. Sources: (i) Section 4 in Reis "Why Did Inflation Rise and Fall in 2021-24? Channels and Evidence from Expectations" (ii) This simple exercise is inspired on the analysis of Barro and Bianchi “Fiscal Influences on Inflation in OECD Countries, 2020-23.”

@godot411 To say who performed best, you have to tell me how you weigh high inflation versus high unemployment.

@R2Rsquared What about the relative recoveries from the pandemic? Which country’s outperformed? Seems US recovered far more quickly than others. The cost of a little more inflation to get millions working seems well worth it. Particularly when real wages outperformed others.

@david_locke_ I could speak for hours about that. As a measure of credibility of an inflation target, they are close to the best measure. But you can greatly improve the signal you extract from the data by using models and statistics.

@R2Rsquared What is your opinion about using break-even inflation rate as proxy for expectations ?

Are inflation expectations well anchored right now? With a new supply shock hitting the global economy, an important question is whether inflation expectations are well anchored. If they are, the shock may have only a quick and temporary impact on inflation. If they are not, there will be “second‑round effects,” as firms expecting higher prices raise their own price, and workers demand higher wages. Just as importantly, if the 2% target loses credibility, consumers and savers may start expecting persistently high inflation, making it far more painful to bring inflation down (think Volcker). Surveys of professional forecasters and market prices of swaps and indexed bonds show that long‑run expected inflation expectations have been roughly on target for several years. The anchor is back in place. But is the anchor as solid into the ground as before the inflation surge? No. Take the answer of a professional forecaster (say the chief economist in a bank) to a survey question: what do you expect average inflation to be over the next 10 years? Compare today’s answer to their answer three months ago in the same survey. If expectations are firmly anchored, this number should not have changed much. The answer should especially not react to whatever happened to inflation during these past three months. It should even more especially not react to how its value differed from what that person expected 3-month inflation would be back then. Long‑run revisions should be uncorrelated with recent inflation surprises for that person. The table below shows the estimates from regressions of long‑run forecast revisions on short‑term surprises (forecast errors) in two periods. The top row uses data from before the 2021 inflation surge; the bottom row uses 2022–25 data. For the US, the link between the two rises by a factor of 4.7. For the EA, it jumps from zero to significantly positive. The long-run inflation anchor is back in place. But it is not as solidly grounded today as it was before the pandemic. Note: a coefficient of 0.09 means that if the inflation in the past three months was 1pp higher, than expected inflation over the next 120 months rises on average by 0.09pp. Using statistical estimates of the persistence of inflation shocks, this is large. Source: Section 2 in Reis "Why Did Inflation Rise and Fall in 2021-24? Channels and Evidence from Expectations" and the references in it.

@ForVad72 Yes, financial markets ultimately will reflect the real economy.

@R2Rsquared Markets can absorb spikes. They struggle when a shock starts changing behaviour. The real threshold is when households, firms and lenders begin treating higher inflation not as a temporary disturbance but as a planning assumption.

@CrisisStudent The same ends in 25Q3, so 2024-25 are there. You could, in principle, separately look at those 7 observations.

@R2Rsquared How do the results look for 2024-2025? I suspect that the 2022-2023 period in euro zone is period when many SPF forecasters move from long-term inflation below 2% to 2%, so the coefficient is picking up that.

Is the Phillips curve useful to make sense of inflation? A.W.H. Phillips first postulated a negative empirical correlation between inflation and the level of economic activity. Looking at inflation in 2021-24---up and down---versus measures of unemployment---roughly unchanged---shows little correlation. Has the Phillips curve failed, yet again? No, it did not. Friedman and Phelps, almost 50 years ago, clarified that this correlation should only hold keeping expected inflation fixed. Almost every account of how firms choose prices or bargain wages with their workers predicts that expectations would show up in a Philips curve. Moreover, those models of behavior further add that increases in marginal costs (supply shocks) would further shift out this relation. The empirical Phillips curve has for many decades meant a negative relation between inflation and real activity, controlling for expected inflation and supply shocks. The left figure below shows on the vertical axis inflation, after controlling for expected inflation---mean and disagreement from a household survey---and for supply shocks---gas prices and global supply pressures. The horizontal axis shows a measure of slack in the labor market---the log of the ratio of unemployment to job vacancies. The Phillips curve held nicely and steadily throughout. A criticism of that figure is that its is looking in the rear view mirror: the measure of supply shocks and the measure of slack were developed in the last few years and the data has been revised. The right figure does instead an out-of sample exercise. Estimate a regression of inflation on (i) expected inflation, (ii) the difference between the unemployment rate and the CBO estimate of its non-cyclical component, and (iii) the PCE energy price index. Do it on data pre-pandemic: 1984Q1-2020Q1. Using that estimated equation, predict inflation in real time from then onwards using the data releases available at the time of the forecast. The Phillips curve was a pretty good predictor of inflation throughout. The Phillips curve was stable during the inflation surge, and it predicted well the movements in inflation, with expectations playing a key role in those predictions. Notes: it is important to include the right measure of expectations to understand inflation-activity dynamics at a business-cycle frequency: the short-horizon expectations of households and firms. (For instance, the long-horizon expectations from professionals, or the expectations from models in policy institutions, as in my previous two posts, are the wrong measure.) Sources: (i) Section 3 in Reis "Why Did Inflation Rise and Fall in 2021-24? Channels and Evidence from Expectations" (ii) The simple exercise on the left figure is inspired on the analysis of Bernanke and Blanchard “What Caused the US Pandemic-Era Inflation?” (iii) The simple exercise on the right figure is inspired on @jadhazell "Comment" in the NBER macro annual 2025, which in turn built on Beaudry, Hou, and Portier "The Dominant Role of Expectations and Broad-Based Supply Shocks in Driving Inflation"

New CEPR Discussion Paper - DP21277 Why did Inflation Rise and Fall in 2021-24? Channels and Evidence from Expectations Ricardo Reis @R2Rsquared @LSEnews @LSEEcon ow.ly/HB9g50YsJGh #CEPR_MEF #EconTwitter

@thomdvorak On this particular post: the 10-year forecast has useful information because with a credible 2% inflation target, the answer should really be 2% always. Forecasters, like you, may be erratic. But a systematic relationship says something about credibility of the target

@thomdvorak I share your reservations about SPF data but I have a different view about them (and most data): there is signal here and it is the job of the analyst to filter out the noise, however large that may be.

@World_Data_A Thank you: I share your thoughts

Thanks for the work If policy risk has a door to knock on, this might be it A few thoughts First, I think even if the relationship shown is only a correlation, it could still reflect an underlying causal mechanism. Correlation alone does not rule out causality. Second, this example illustrates how strongly the design of an economic analysis and the construction of the dataset can influence the conclusions we reach. Third, it reminds us that examining differences (unexpected changes) rather than just levels can be an important empirical design choice that deserves attention. Fourth, expectations themselves play a central role in macroeconomics. When shocks are measured relative to prior expectations, the interpretation of policy effects can change significantly. Ultimately, one cannot help but wonder how many studies in economics, because of imperfect design or data limitations, may have produced misleading policy recommendations, some of which were even implemented.

@_JackSalmon_ @FriedrichHayek Enjoyed reading it.

@R2Rsquared @FriedrichHayek I touched on some of these themes in the literature last year. As well as responding to the flawed “greedflation” arguments. open.substack.com/pub/unseenandu…

@curiousfox1409 No, almost every theory I know that connects surprise deficits to inflation would have this correlation. Including old-fashioned IS-LM by the way.

@R2Rsquared We are all FTPLers now. It's pretty shameful how a large chunk of academic economics swept FTPL under the rug just because they're progressives and policy prescriptions arising from FTPL are perceived as "right-wing"

@FillingTheCrack No, I dont think so. These are the 2000-2024 deviations from their 2019 forecasts. It is how the actual data moved relative to the benchmark of the forecasts; not about how the forecasts moved. Sorry if this was not clearer.

@R2Rsquared This logics is... weird. Researching the relation of variables by deducting IMF forecast from real data assumes the IMF already knows the relation of those variables and baked it into its forecast.

@ernietedeschi Indeed, but not a challenge to the correlation I show. A challenge to the common claim that the US did large fiscal stimulus and the rest of the OECD did not. Not true once you add up over the 5 years, as your figure also shows.

@R2Rsquared A challenge is that the US only looks biggest when summing up statutory scores of new federal legislation. When you look at actual gen gov't primary deficits, which account for 1) actual money out the door, 2) automatic stabilizers, the US is high but not as extraordinary.

@JapanMacroBrief Yes, and this post starts with an oft-repeated claim that fiscal is zero, to show a data pattern that says it is positive. To quantify how much you need much more structure. But whatever that is, it has to be consistent with this figure.

@R2Rsquared The question is how much of the inflation surprise was fiscal vs monetary.