Inflation and Monetary Policy

Discussion of the Economic Model in SR2010

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Koheleth
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Inflation and Monetary Policy

Post by Koheleth »

Reading through these threads (I'm not a beta tester) it seems like the game builds in a Phillips-Curve model of inflation and unemployment. This is idiotic. No serious economist since the 1970s believes that low unemployment causes inflation -- or that higher inflation lowers unemployment.

Milton Friedman proved that inflation is caused SOLEY by expanding the money supply to quickly. That's why we had stagflation in the mid-1970s, and a perfect boom in the 1990s.

If you are going to have inflation in the game, SERIOUSLY consider adding a rudimentary monetary policy angle. By tinkering with monetary policy, you can TEMPORARILY increase growth / lower unemployment by tricking the market -- good for a short term popularity boost, at the expense of requiring a tight monetary policy to bring down inflation at the expense of a TEMPORARY recession.

Other effects (both good and bad) of monetary policy:
1) By inflating, you can drive down the real value of your national debt.
2) If you do inflate even temporarily, interest-rates will stay high for a LONG time, lowering your long-term economic growth rate.
3) High inflation will add "menu costs" to the economy, working like an extra tax that saps revenue and/or production from your nation.
4) Deflation (i.e. negative inflation, not simply lowering the level of inflation) is ALWAYS bad -- it increased your national debt level, totally destroys the interest rate system (because it screws with the ability to have real interest rates), and slows growth because it encourages hoarding.

How to implement it:

Add a slider for "monetary policy" ranging from VERY LOOSE to VERY TIGHT. Allow players to adjust the slider back and forth to achieve the proper monetary policy balance. Also allow players to click an option to have monetary policy automanaged for either price stability or low inflation.
Penta
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Post by Penta »

Problem.

Interface has been locked already, and, most devastatingly....

There's a global currency.
Slash78
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Post by Slash78 »

and a perfect boom in the 1990s.
I would hardly call it perfect, more like the substanceless boom. Plus inflation was kept in check by two factors, the shifting of the tax burden on the middle class in the '80s and '90s, thus decrease their purchasing power and a shift to the 'new service-based' economy. Yes, more people were working, however they were also working more hours (decreasing the amount of purchasing time) and making less money ('MacJobs').

In the '70s the nation was in turmoil and energy prices were shooting through the roof. The 'monetiary policy' shell game didn't work very good then.
Koheleth
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Post by Koheleth »

[quote="Slash78"][quote]and a perfect boom in the 1990s.
[/quote]

I would hardly call it perfect, more like the substanceless boom. Plus inflation was kept in check by two factors, the shifting of the tax burden on the middle class in the '80s and '90s, thus decrease their purchasing power and a shift to the 'new service-based' economy. Yes, more people were working, however they were also working more hours (decreasing the amount of purchasing time) and making less money ('MacJobs').

In the '70s the nation was in turmoil and energy prices were shooting through the roof. The 'monetiary policy' shell game didn't work very good then.[/quote]

McJobs have nothing to do with inflation. They also had nothing to do with the 1990s, a decade when real per capita GDP increased substantially.

The energy price spikes of the 1970s caused temporary price shocks, but not inflation. The inflation of the 1970s was precisely caused by monetary policy, under the Fed's Arthur Burns (a proponent of the idiotic "Phillips Curve model") and continuing until Jimmy Carter had the balls to appoint Paul Voelker.

Learn some history
Koheleth
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Post by Koheleth »

[quote="Penta"]Problem.

Interface has been locked already, and, most devastatingly....

There's a global currency.[/quote]

Well, any type of "inflation" doesn't make sense with a global currency. That being said, within the constructs of the game, there are easy ways to mimick the true effects of inflation. For example, at the end of each year, decrease national debt by an "inflation" bonus, to simulate the effects of inflation reducing the real value of debt. Another example might be, if inflation stays above a certain level and proportional to its rate, adding in a "growth" penalty that decreases GDP growth for X number of years (i.e. inflation of 10% inflation for 1 year might mean, for example, GDP growth slows by 20% for five years, inflation of 20% for one year could mean GDP growth slows by 50%)
Penta
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Post by Penta »

Devs, does any of this babble matter worth a bucket of warm spit? :D

Or is none of this likely to change?
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Balthagor
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Post by Balthagor »

It'll be at least Monday night before George even gets back to the forum and he's the only one that could really debate this...

Weekend posts rarely get quick response... ;)
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Slash78
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Post by Slash78 »

If you have 20% inflation for one year you would have a revolt. Almost no one would be able to pay for anything anymore. Things would become too expensive. It would drastically reduce the amount of money you take in for sales tax. That and the people would be very unhappy.
red
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Post by red »

Where?
clayog123
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Post by clayog123 »

Take it easy everyone. No need to get nasty, and no need to become an economist to sucessfully play this game.

and, with the interface locked...maybe in the next version? Could make for interesting addition.
Koheleth
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Post by Koheleth »

[quote="Slash78"]If you have 20% inflation for one year you would have a revolt. Almost no one would be able to pay for anything anymore. Things would become too expensive. It would drastically reduce the amount of money you take in for sales tax. That and the people would be very unhappy.[/quote]

You ever seen inflation rates around the world? There have been countries with 1000% a year inflation. Even reasonably developed countries have had bouts of hyper-inflation. Inflation reached 300% a year in Israel in the early 1980s, for instance. Yes... it did cause serious economic problems, but it's quite possible to happen.
red
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Post by red »

"Extreme examples include Germany in the early 1920s when the rate of inflation hit 3.25 million percent per month; Greece in the mid-1940s with 8.55 billion percent per month; and Hungary during the same approximate time period at 41.9 quadrillion percent per month (4.19 × 1016%)." :D

"Hyperinflation"
RCBricker
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Post by RCBricker »

Koheleth is right on just about all accounts.

I am not suggesting the devs run out and get a masters in finance or management but for a game in which players want tons of realism there is almost no realism in the economic model that has been used.
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tkobo
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Post by tkobo »

[quote="RCBricker"]Koheleth is right on just about all accounts.
quote]

Actually hes not.His first paragraph claims that "Phillips-Curve model of inflation and unemployment" is no longer used by any "serious economist since the 1970s "

However The Federal Reserve Bank of New York - Economic Policy Review, Dec, 1997 clearly states that as of 1997 it did indeed still use this model .

Next he claims that the econmist Milton Friedman proved that inflation is caused SOLEY by expanding the money supply to quickly.
In reality he proved no such thing.In reality he put forth some very solid theories which some to this day believe, and others dont.
As with almost all economic theories there can be found intelligent serious economists that disagree with all or part of a given theory.

As this pertains to the game.I see no reason for the game mechanics to relflect only the theories in which you believe.
This post approved by Tkobo:Official Rabble Rouser of the United Yahoos
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RCBricker
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Post by RCBricker »

Go away and stop trying to continue your arguements against me. I have already grown bored with our conversations and have asked nicely in PMs that we stop debating, arguing, or conversing.

So one final request. Please feel no need to chat as I will no longer be responding to you. SImply because our debates go on forever and usually are not as civil as they should by. I agree to disagree with you on all subjects now or future.
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