Interest Rate Policy Evolution

Dynamic Taylor Rule: Integrating Conditional Volatility of Inflation and GDP in Interest Rate Policy

Estimated read time: 1:20

Summary

In this video, the creator discusses the complexities and nuances involved in setting optimal interest rates, particularly through the lens of the Taylor Rule. He critiques traditional economic frameworks for their assumptions on inflation and GDP volatility, advocating for an integration of conditional volatility calculations. The creator shares insights into the historical roots of economic theories and the evolution of domestic economies from family units in ancient Greece to modern complex systems. By presenting his own theoretical framework, he aims to provide a more comprehensive understanding of economic management in the context of varying economic conditions.

Highlights

The video opens with a discussion on the symmetry of inflation targeting and why it might be problematic when large shocks occur in inflation volatility 🎯.
The creator dives into the etymology of economics, explaining its Greek origins and its intrinsic link to family-based domestic management 🏠.
Challenges in calculating potential GDP output are highlighted, showcasing the complexity in economic modeling 🔍.
A new theoretical framework for considering conditional volatility in inflation and GDP is presented as an improvement to the Taylor Rule ⚙️.
The video closes with a recap of the creator's economic viewpoint, emphasizing the need for broader, more integrated economic models that reflect real-world conditions 🌍.

Key Takeaways

The Taylor Rule, a fundamental economic theory, helps set interest rates based on inflation and GDP output gaps 📈.
Modern economic systems often overlook the volatile nature of inflation, leading to flawed policy frameworks 🌪️.
Understanding historical and cultural underpinnings of economic theories can enrich how we apply them today 🏛️.
Interest rates should consider conditional volatility of inflation and GDP for better precision 🚀.
Economics isn't exact, but it's critical to strive for accuracy by continually refining models 🛠️.

Overview

In this insightful video, the creator challenges the traditional understanding of the Taylor Rule by suggesting it may not adequately account for volatility in inflation and GDP. He contends that current economic policy models are flawed because they assume inflation is symmetrical and non-volatile, which is rarely the case.

The creator traces the origin of economic theories back to ancient Greece, highlighting the fundamental role of domestic economics—or household management—in shaping broader economic systems. This historical perspective enriches the understanding of how modern economic models came to be and how they might evolve.

Ending on a forward-thinking note, the creator introduces his own theoretical framework which integrates conditional volatility into interest rate policies. This method aims to provide a more accurate and responsive approach to managing economic conditions, encouraging viewers to consider the dynamic nature of economic systems.

Chapters

00:00 - 09:00: Introduction & Channel Background In the introduction of the chapter titled 'Introduction & Channel Background', the presenter welcomes the audience back to the channel named Economica. They express their happiness to be with the audience. The presenter refers to previous videos where they have discussed their concerns and confusion regarding the symmetry and asymmetry involved in inflation targeting within monetary policy, especially in the face of major inflation shocks.
09:00 - 21:00: Economic Philosophy & Family Economics The chapter delves into the concepts of volatility and asymmetry in economic shocks, focusing on how institutions like the ECB and the Federal Reserve aim to maintain symmetrical inflation targets, typically around 2%. The discussion touches on the complexity and volatility of economic parameters, offering insights into the challenges faced by policymakers.
21:00 - 31:00: Conflict in Economic Systems The chapter titled 'Conflict in Economic Systems' begins with the speaker expressing a hope that the audience enjoyed the video and encouraging likes and subscriptions for future engagement. The speaker hints at sharing a range of topics related to economics including microeconomics and econometrics. Additionally, the etymology of the term 'economics' is explored, revealing its Greek origins and its connection to the concept of 'ta politica,' described as a masterpiece.
31:00 - 40:30: Developed vs. Developing Economies The chapter discusses the differences and dynamics between developed and developing economies. It starts by mentioning Aristotle's work on politics and briefly touches on lesser-known contributions to economics by other philosophers. These historical references provide a backdrop to understanding the evolution of economic thought.
40:30 - 54:00: Significance of Gross Domestic Product (GDP) The chapter titled 'Significance of Gross Domestic Product (GDP)' discusses the foundational belief that societies are fundamentally shaped by economic choices rather than political ones. The author emphasizes the importance of understanding economics and finances as key drivers in the organization and operation of societies. The discussion touches on the trade-offs inherent in human decision-making, suggesting that economics plays a critical role in these processes.
54:00 - 67:30: Inflation Variability & Economic Decisions The chapter explains the etymology of the word 'economic,' tracing its roots back to ancient Greek. The Greek word 'oikonomikos' comes from 'oikos,' which means 'family.' This illustrates the idea that managing a household in ancient Greece is a foundational concept for modern economic theory. The speaker shares that their understanding of this is gleaned from reading philosophy, despite not being a Greek speaker.
67:30 - 78:00: The Taylor Rule & Volatility The chapter discusses the Taylor Rule and its association with economic volatility, specifically how societies manage their domestic economies. It hints at a complex interaction of small groups within a town or political entity, without delving deeply into specifics.
78:00 - 89:00: Optimal Interest Rate & Economic Models In this chapter, the concept of economics is introduced through its etymological roots. The word 'economics' derives from the Greek 'o economia,' which originally referred to household management. The chapter touches on how historical understandings of domestic economy, such as management of family resources, have influenced modern economic thinking.
89:00 - 99:00: Conditional Volatility Models The chapter titled 'Conditional Volatility Models' appears to reflect on the contrast between ancient economic structures and modern-day market economies. It highlights how ancient economies were less developed, often tied to specific industries such as crafting weapons or shields, agriculture, and maritime activities. The transcript suggests that these ancient economies functioned as smaller, domestic systems rather than the expansive market economies we see today.
99:00 - 109:00: Interest Rate Strategies for Real Economy & Financial Markets The chapter discusses strategic approaches to formulating interest rate policies that affect both the real economy and financial markets. The speaker intends to elaborate on economic concepts by creating educational content on their channel. The name of the channel, 'economica,' was chosen to encompass all topics related to economics.
109:00 - 118:00: Simulation of Inflationary Shock from Tariffs The chapter delves into the concept of 'okonomia,' which is derived from the word 'oos' meaning family. The discussion emphasizes that the foundation of societies is the family unit, comprising various members such as a man, a woman, children, grandparents, uncles, and aunts. This foundational perspective sets the stage for exploring the broader economic implications, particularly in the context of simulating inflationary shocks stemming from tariffs.
118:00 - 130:00: Impact of Tariff on Car Prices and Sales The chapter explores the impact of tariffs on car prices and sales, focusing on how these economic measures affect familial and sociological structures.
130:00 - 143:00: Concluding Remarks & Future Content The concluding chapter discusses various forms of family arrangements in modern society. It highlights the diversity among people living together, such as individuals from different parts of the world sharing a house and forming a family-like bond for economic reasons. It also mentions traditional families, cohabiting couples who are not married, and families where children live with grandparents due to parental absence or divorce. The chapter emphasizes the wide array of family structures beyond the traditional nuclear family.

Dynamic Taylor Rule: Integrating Conditional Volatility of Inflation and GDP in Interest Rate Policy Transcription

00:00 - 00:30 hello champs welcome back welcome back to Economica very happy to be with you today so previously in my previous videos I explained why I was so um uh upset and bewildered about um the symmetry of um uh inflation targeting for monetary policy and the asymmetry at the same time large shocks in inflation
00:30 - 01:00 volatility and the asymmetry of shocks and why we uh the ECB still continues to have a symmetrical target of 2% or the Federal reserve as a symmetrical target of near plus or minus 2% so uh if inflation is um a networkastic volatile uh parameter so previously my life in my other video I was uh ranting ranting about this stuff so back to me now and I
01:00 - 01:30 hope you enjoyed my video and please like the video subscribe if you're new around there i will tell you a lot of interesting things all my findings and research and all my um blubbering about um um microeconomics econometrics and uh uh everything about economics because economica uh it's a Greek word uh that means well the uh the idea comes from ta politica which is the masterpiece of
01:30 - 02:00 Aristotle about politics but um there are other um the semary wrote a book about economics uh which is less known and many other um and other um Greek philosophers if I'm not wrong some somebody senonte okay I'm telling I'm saying in Italian because I can't translate in English also wrote a book a
02:00 - 02:30 book about economics so uh the idea of economica it's economica all about economics or all about finances and why why I said uh why I decided to call the channel uh economica because I'm a strong strong strong advocate um of the fact that societies they are made of economic choices they're not made of political choices so um I'm I'm not saying that human beings there is always a trade-off between things but
02:30 - 03:00 um basically um to to wrap up the the concept is that the word um oconomica comes from oos oos in Greek it's uh translated ancient Greek it's the word for family so um um o economica basically basically very basically because I I don't I don't speak Greek uh I just know a few words from reading philosophy so the word economica comes
03:00 - 03:30 from oos that means the um the management or the dealing of the um domestic economy okay so what what this means is that societies wer societies the um uh polye I mean the the citizenship and the pol the town it's made of oos or of many um small groups which are
03:30 - 04:00 families okay and so the the oos the the the managing of the oos from the managing of the oos comes the word o economia like economics okay so it's the the managing of the um domestic economy because in ancient Greek we know that uh there was the um the the every family home had uh its uh backyard and there was the I don't
04:00 - 04:30 know well there was somebody was uh building uh swords or shields or uh there were the the families with land for um agriculture or families Greek families who had um cattle or ships so in in ancient times the economy was not a developed market economy as we have now was a small uh domestic economy and the the the management of the economy it's was
04:30 - 05:00 based on what were the the resources of the the the the domestic production so that's why I decided to go my channel in a very um very broad and um in a broad line explanation but I will do a video explaining about economics um why I decided to call my channel economica or ta economica everything about economics because o economia it's
05:00 - 05:30 a word that derives from oos oos means family so okconomia is the managing of the domestic economy And so because societies are made of the the the basic stone or uh or brick of societies it's families now we can say families are made by a man a woman and kids and grandfather and grandmother and uncle auntie whatever yeah and so this is the
05:30 - 06:00 traditional families but we can have some other sort of families i don't want to enter in sociology but a whenever you have a let's say a not an association of people but um a a a familiar group of people then this familiar group of people is linked together by uh sociological and anthropological reasons and by economic reasons okay so if you take share houses uh in England you can
06:00 - 06:30 have different people that come from any parts of the world they share a house and they become like a family sort of and they are linked by economic reasons because they have to pay rents bills and so forth and so on so we have traditional family there are some other kind of arrangements like couples which are not married but they live together so or we can have families where kids live with their grandparents they don't have their genitals yeah they don't have their parents or their parents they are divorced there are all sorts of uh
06:30 - 07:00 anthropological and so sociological flavors and differences but the basic stone of society it's a is that group of people that is called family your family your relatives and so the the family the households needs management you have to pay the mortgage you have to pay rent you have to pay bills you have to pay food uh that is o economia and so when we look in aggregate what is the economy
07:00 - 07:30 of a whole society then we call of um the domestic economy of domestic gross product which is or gross domestic product sorry which is GDP the aggregate economic output of a whole uh country whole society yeah uh just don't don't don't misunderstand uh the world society uh this is not in exclusive like the whole the aggregate output the whole population in a certain geographical area it can be United States Canada
07:30 - 08:00 Mexico all these basically places which are divided by boundaries okay by borders but I don't know anywhere Italy you know all the aggregate output domestic output of Italy the It's the gross domestic product but still gross gross domestic product so GDP still has even if it's in English it still has this intrinsic word which is domestic which identifies with that country with
08:00 - 08:30 that geographic geographical area but that comes from oeconomia because we have in the in English we have the word economics that comes from Greek which is o economia and I just say that o economia derives from oos oos in in Greek means family so is the management of the the economy of the household Okay and so the domestic economy so from the the basic group the basic uh stepping stone the basic brick of the fabric of
08:30 - 09:00 society which is a a family in all its different uh flavors and anthropological and so sociological nuances and and uh eerogenities so on a broader scale which is the the whole population we have the domestic economy of a country defined by border and that is the gross domestic product so that's why I called back in my previous life I called I decided to to call my channel economica t economica
09:00 - 09:30 because I don't believe in politics i believe I I see I've come to the reasoning that politics it's a waste of time and it's um it's a place where people they are um uh brainwashed they are subserved they become servants and subservient to ideologies and politics works for ideas or ideals but in reality any family
09:30 - 10:00 needs to pay the bills pay the rent go to work have food on the table feed your kids uh have given education and uh uh have a house or I don't know have some leisure time go to the library go to the um to the fair uh fair event like all these um I don't know like the other day there was the St patrick
10:00 - 10:30 celebrations and all these open spaces where there are celebrations with your family and have fun so people need they live for concrete things they go to the shop they buy groceries and that is an economical choice not because there is a tradeoff but because society is structured about all economical choices okay everything is uh um it's not so simple to say oh is the economy stupid no because the economy is very
10:30 - 11:00 stupid that's the problem the other problem the other side of the coin is that the economic system that that we have is very very stupid because it's it's uh based on consumption it's based on immediate gratification it's based on uh superfluous thing excess consumptions excess luxury uh all that is it's uh a detriment for the well-being of and the development of the the person and of
11:00 - 11:30 society okay or the the the neighborhood or the uh yes the the citizen the citizenry of of a town because our economy not our the economic system that has been imposed on on a global scale is an individualistic selfish economic system which is based on on immediate gratification and on excesses on on um excess consumption which is unhealthy
11:30 - 12:00 and excess luxury based on ignorance and that's why then we have all these bad derivation that people they become xenophobes they hates uh foreign people they hate poor people you know it's a dehumanizing uh a dehumanizing um stupid economy uh ideology exactly because it's an ideology that that's why it's bad
12:00 - 12:30 so I try to explain you why I call my channel all economic all about economics because life is families and societies and whole economies they're made of economic choices and so the the the best point of an economic choice is when basically nobody is worse off okay or there is general equilibria so that like a a wave that lifts all
12:30 - 13:00 boats doesn't mean that everybody's rich that means that society leaves so many things which are concrete things and so are economic choices that can be a book that you want to read a concert and a football match that you want to see or a I don't know a restaurant or the job that you want to achieve and the present that you want to buy to your brother to your sister to your auntie to your grand to your grandma all these
13:00 - 13:30 very nice things these are all economic choices but these economic choices they are intertwined with sociological and anthropological uh structures which are this is a very difficult subject which I'm not an expert of but the sociological and anthropological uh nuances and structure of societies they are what they are a a factor often a determinant factor of economic choices
13:30 - 14:00 on a broader scale on a in a broader population which is the citiz the whole a town or a region economic region or a countries so but the thing is that we live society lives in conflict in economic conflict more developed society more than developed society they live today in economic conflict with the economic regime because the economic regime as I say is an economic regime is based on individualism is based on uh
14:00 - 14:30 selfishness is based on instant gratification so there is no uh community spirit there is no Um there is no uh looking for the well-being of other people there is no concept that going to work is um trying to achieve progress for the whole of society and for the whole of humanity going to work is a career it's aspiring to a huge salary huge bonuses and it
14:30 - 15:00 doesn't matter if you are uh dumping in the market CLOS or uh uh toxic um u credit derivatives it doesn't matter if you are dumping on the financial markets uh mortgage back securities commercial mortgage back securities it doesn't matter if you are defrauding uh investors or if you are defrauding savers if you are stuffing pension funds private pension funds with toxic
15:00 - 15:30 derivatives which will blow up billions of savings of people so this is the kind of conflict that we have in our societies and which is the economic system which is pred predatory and is selfish and which is at the polar opposite and is in conflict with the well-being of the wider population that's why we have cost of living crisis there is
15:30 - 16:00 um struggling of low income people the uh people who who have uh it's defined as um a at all the echelon of society we have struggling also for middle inome families like a family with the mother and father they have two incomes and they have kids they are struggling they they struggle to afford a house even if it's renting or buying a a for the first time a house for their kids because there is this selfish concept that the
16:00 - 16:30 most the the economy is it's not made this economic regime is not made for the well-being of whole for an average general equilibria that brings a well-being of a whole population which is the the economic well-being it's also the health well-being the societal well-being the the the diminishing or the the the healing of societal
16:30 - 17:00 conflicts the the healing of crime the healing of poverty because the Greeks they have a lot to to teach us um the economic science in in ancient Greek was at the same in the same category as the um health science as medicine the Greeks paradoxically believed that good management of the households was very um important for the health the well-being of the person okay so that's why they
17:00 - 17:30 they put on the same level the economics science with the health science in fact we say health is wealth yeah you must be healthy in order to to work and to achieve and to be with your loved ones so that's why to have a broader economic framework that works for everyone that includes all parts of society all parts of the population without discriminating but working all
17:30 - 18:00 together for the well-being of everybody without being subservient to powerful people it's what the the the meaning of my channel is it's all economic it's all about economics how society can work well together in harmony for the well-being of everyone so that there are no societal
18:00 - 18:30 conflicts so this is the first stepping stone that we should be able to achieve at least we had been like 5,000 years that human beings on this on these planets maybe longer but we still have a lot of difficulty because we have to compete or there are parts of society which repress other part of society and there are all sorts of econ economic problems by wages are too low because maybe most of the quantitative easing is as flooded
18:30 - 19:00 financial assets so people have lived with what is perceived austerity but now we have exploding public debt to GDP ratio but where all the money has gone has gone in financial asset and people ordinary working people the 99.9% of society and of the population they are stuck with the same wages more or less that were 10 20 30 years ago it depends from the geographic area that you move around on the geod
19:00 - 19:30 geodasic sphere Here it's a sphere which is a bit squashed at the poles which is planet earth depending on the geographic area when you find yourself you see that financial asset have have uh in inflated and lots of their value but the vast part of the population in a country or the global population they live with with the minimum or the average like middle
19:30 - 20:00 class if you want to talk about classes but I don't believe in the class system so that's why my aim is to uh identify what are the imbalances in the economy what are the problems what are the financial risk so that to make ordinary people aware because at the end the bill comes to the ordinary people which have to work and pay taxes and and and eventually the the government has to bail out banks or private institution which they they basically they bankrupt
20:00 - 20:30 the entire global economy and this is a risk it's constant risk that we have all the time so uh after I explained back in my life back to me now after I explain why I call my channel economica and please subscribe uh you have been on this page which is a uh Python page and I've done a little bit of research and I managed to build my own
20:30 - 21:00 uh Taylor rule okay so what is the Taylor rule so the Taylor rule is the um um the formula that was created by the economist Taylor the economist and which sets uh the theoretical framework for uh establishing what is the optimal level of interest rate according to the inflation gap and the output gap
21:00 - 21:30 that you can find in an economy uh then we have some more modern concept which is the uh Lubak William model which the the Federal Reserve still is trying to to to understand now uh which is based on the neutral level of interest rate but as I will [Music] um explain in a in a in a bit I don't
21:30 - 22:00 believe that the um I don't find the neutral level of interest rate to be just one parameter and I don't identify the neutral level of interest rate as um as it has been um theoretically uh theorized uh as the difference uh is only the difference of inflation output or GDP output um
22:00 - 22:30 um I strongly believe that to determine the level of interest rate we need to account for the level of volatility whether is the gross domestic product the variability of the gross domestic product or the the the variance the variability of um inflation and well the the loia model basically utilize some new canson dynamic stoastic uh general equilibrium
22:30 - 23:00 framework so they they twist around a bit the the the economic the uh I mean the mathematical formula but it's mostly based on what is the the level of output what is the level of potential output it depends but then the the the big unknown it's how not how it's uh there are different methods to uh arrive or to calculate the potential output so there can be already some uh discrepancies or
23:00 - 23:30 different values and that from a precision um standpoint of having a a a theoretical model for interest rate when when you have a sets of different methods to achieve the same uh result which is uh potential output then you start to wonder which is the number that I have to use if I use a um odrik presscot filter if I use um uh I don't
23:30 - 24:00 know the aggregate supply method um if I have some other method of the other theoretical framework to calculate potential output which is more or less difficult if I use an exponential smoothe trend to see what is the the potential output in in the future there are many mathematical uh instruments that can achieve a theoretical result which I can call potential output but
24:00 - 24:30 then to have a sure and the uh stable and um not stable a solid underpinning uh model that tells me okay this is potential output that's how I calculate it i don't want to deviate from that because that's the best estimate that I can have then I mean me personally I still I'm not there because I need to study a lot more but I don't believe that in the central bank academic
24:30 - 25:00 uh sphere sphere there is this uh precise certainty okay I on what is potential output it can be calculated in many different ways as well as GDP I can calculate it as the aggregate of the goods and services i can calculate the GDP just only by seeing not only I can I can compare the aggregate supply or production in the economy of all goods and services and and I can compare it
25:00 - 25:30 with that of the previous year so I can see the change in GDP by the stock and the aggregate production of goods and services from quarter to quarter or year to year so a country can be uh it could be growing its aggregate supply if it's producing more goods and services then I can calculate GDP on based on on the base of consumption if I if I'm consuming more goods and services like
25:30 - 26:00 what is GDP price index GDP um on the basis of uh sales aggregate sales and um I can calculate GDP on the on the also on adding some other variables what is the uh stock of savings there are many nuances so by no mean economics is an exact science you have to you have to try to be as accurate and as precise as possible and uh I am the last man on
26:00 - 26:30 earth which can uh uh argue about something because I need to learn still I I I have to learn a lot more but um what I'm saying is that for example the the loan model to achieve an a new level of interest rate is more or less similar to the uh mechanics of uh the Taylor rule and but Um on the contrary my focal point is that the um overall economic
26:30 - 27:00 system that we have today uh it doesn't work on one level of interest rate but uh for example we should have a a set of parameters uh a level of interest rate which is for the real economy and a level and another benchmark of interest rate which is for uh financial asset and financial speculation of course this thing is is much easier to say than done because the
27:00 - 27:30 first objection that I can do to myself is oh there is an arbitrage because if I want to set the level of interest rate the optimal level of interest rate for the economy at three and a half% and I want to set the optimal level of interest rate for the financial market at 4 and a half% or 4.6% 6% then there is a 100 basis points arbitrage that could be exploited or that uh can generate some sort of disequilibria but uh of course this is something that uh I
27:30 - 28:00 will I will work out myself if I if I can but it's not one of my first priorities so what is my uh idea my idea is that um um the Taylor rule needs some uh improvements which I don't think I'm the person that I'm bringing this improvement but I will show you what is my uh theoretical framework work okay so I built a t rule which is based on the
28:00 - 28:30 um I don't know if I can no I cannot uh write the rule okay so basically um we have a level of interest rate which is uh I or R and then um okay just bear with me chs one second i will do a little a little um I will take I'll try
28:30 - 29:00 to take an empty page do I have an empty page somewhere okay yeah I have it here so the zero rule says okay I have I want to know what is the level of interest rate and the formula is uh the optimal level of interest rate it's the uh actual level plus the act of interest rate um plus the actual level of inflation plus a parameter alpha which normally is a fixed number which is 0.5 or 1/2 otherwise and the inflation gap
29:00 - 29:30 which is the Um no sorry let me It's just a a a a formality but this is the the um let's follow the formality okay this is the level of inflation at time t uh the level inflation at time t like today minus the target of inflation let's say 2% although I don't believe it's 2%
29:30 - 30:00 minus beta which is the same of alpha and then it's the level of GDP at time t minus potential output this is the tailor rule now my first uh plus my first belief was okay to this Taylor rule I want to add a sigma sigma uh in this case is volatility and I want to add a conditional volatility
30:00 - 30:30 parameter times a gamma a coefficient at at time t of inflation okay because it's not sufficient for me to know what is the inflation gap so what is the inflation today visa v my uh the inflation target which is 2% and about inflation target we could go on on and on and on and on because inflation they want it symmetric to 2%
30:30 - 31:00 okay let's say this they have a normal distribution but it's symmetric around 2% so the average the mean has to be 2% but there is a problem although this you can theoretically argue that uh inflation is normally distributed although I I have some doubts that it's normally distributed in fact if you if you do the uh stationary analysis of the
31:00 - 31:30 inflation historical time series you will see that inflation is not normally distributed so if inflation is not normally distributed and it has another uh feature which is aoscadastic so it means that the error variance like there is when I do the first difference I have also a term which is the error term so the sigma of ET it's it's not constant
31:30 - 32:00 it's not equal to K so it's not even the the variance of the error in inflation is not a constant term so that means that in itself all uh the historical data and the behavior of inflation across time uh it's volatile and its volatility is not always is not constant but also volatility varies and I want to give you as a very easy example if today I you go to the petrol
32:00 - 32:30 station and you find petrol that costs I don't know one pound 60 per liter or $3 per gallon you you basically spend I don't know $20 or 20 pound to fill up the tank and you will do um 50 kilometers okay or 50 miles right so tomorrow you go to the to the same petrol station and you will find that petrol gasoline is not $3 a gallon as I
32:30 - 33:00 said one minute before or it's not 160 a liter but it's $3 um and $350 a gallon or it's two pound a liter so with the same 20 or 20 pound you will try to fill up the tank the result is that you will have less fuel in your tank in your car or your motorbike and you will do not you will not cover 50 mile but you will call 40
33:00 - 33:30 mile this is the same of inflation so the variability of inflation so the volatility of inflation it's not constant it varies and so um and so you have different results with the same parameter okay i have I can cover different mileage more or less mileage according to how the gasoline price changes with the same input which
33:30 - 34:00 is $20 or 20 um pounds so with the same input by measuring inflation according to how is volatile the price how vary the price then I will have different outputs which is inflation going up or down and logically this means that inflation is not almost the distribution of historical data of inflation is not uh normal is not symmetric to 2% it is not symmetric to zero it's not normally
34:00 - 34:30 distributed and the volatility of inflation is not constant it's eerosadastic the volatility varies ac across time so you can use um you can use standard deviation rolling 7 21 days standard deviation or historical volatility to measure the volatility of inflation you will find that is not a constant but it varies you have so many different values okay so that's why the theoretical framework for from on which
34:30 - 35:00 is based monetary policy it seems to me that it's totally float because you presume that you have a fixed parameter which is 2% inflation but by no means inflation in itself is a constant it varies volatility of inflation also is heteroscadastic so it varies the error variance of inflation it's heteroscadastic unless you use uh robust standard error and then basically you nullify all uh variance effect or error
35:00 - 35:30 variance effect uh at that point you cannot measure anything so from having the all of this concept that I'm just telling you inflation is volatile we all see that prices change all the time retail prices change all the time and all the time prices go up and up and up and maybe the petrol station gasoline is $3 maybe in another state it's $280 or in another state it's $4 so I mean an ordinary person can
35:30 - 36:00 understand that inflation the volatility of inflation or the variance of prices is not constant it varies like from a town to another so it's very bewildering to assume that inflation to work with the theoretical framework which you want to achieve a symmetric an output which is symmetric to 2% while your target in itself is not symmetric it's asymmetric it's volatile and it's heteroscadastic so the least I could do myself is to
36:00 - 36:30 basically to um as I said in the first in the beginning I thought okay I want to add plus a sigma parameter which is the conditional volatility of inflation okay and you can use historical V i personally use uh a a raft of GACH models so I use garch ech I will have to refine my thinking but at least I've confronted four garch
36:30 - 37:00 model to have the conditional volatility of inflation but then I said okay I want to make it things simpler and I say okay let's improve the formality of the tra rule by having the conditional volatility um of real GDP P here and here the conditional volatility of
37:00 - 37:30 inflation at time t so you can take an average of conditional volatility or what is the most recent parameter that you can find and then by just um only utilizing what is the tailor rule then you I could achieve some sort of uh reasonable result that I will show you now but um I can show you now like
37:30 - 38:00 nominal interest rate 3.57% that would be the fat fund rate i will tell you what are the parameters that they are within and how I derived uh the tailor rule is not like solving an impossible integral or a stoastic and SD stoastic differential equation not even quantum mechanics it's a very simple equation and it's based on additional it's nothing it's a very simple uh uh equation but it depends how you uh sets your parameter what are the input what
38:00 - 38:30 do you inject into the equation that it can give you anything okay so uh as I said my first idea was to add a conditional volatility of inflation then because I was not sure of what I was doing I said okay I don't want to change the theoretical framework i want to work around the formality of the formula and utilize some other parameters nevertheless I will I will continue to
38:30 - 39:00 to explore what are the results with this variation in formulas by adding the the conditional volatility instead of multiplying by the um because you can do another very fancy stuff and you can basically calculate the you can use the central limit theorem to calculate the um because I can take the uh inflation um inflation up i can turn it to the central limit theorem i can say okay my
39:00 - 39:30 I can use I can take X um sorry about that I will try to explain myself now I can take pi bar which is the average inflation of I don't know of the sample population of the past 20 years minus um pi uh the target is pi mu right or mu pi or something like that let's let's make it mu pi I believe mu pi I mu pi I'm sorry I'm
39:30 - 40:00 writing with the with the mouse not with the and then I can I I do I standardize by the square root of sigma over n the sample population and I can standardize the inflation out uh inflation gap and I can find the probability by which the inflation gap can be a positive gap or a negative uh gap or um what is the probability of the inflation gap the probability distribution of inflation ation up that I have in this moment so I
40:00 - 40:30 can turn around stuff when I saw the the tailor formula I start to turn around things and because you can change this formula and say okay I have pi bar minus mu pi uh square root of n equals sigma times the zcore okay so but this basically changed from a simple mathematical equation to a statistical terms but this is all stuff
40:30 - 41:00 that uh I will work around myself to to have fun basically this is what I do in my spare time playing around things but anyway so back to back to me now back to back to the Taylor room back to Taylor what have you done today to make you feel proud what have you done on Taylor to make you feel proud that's what you do that's the way you do it okay so what I Okay remember this formula okay so we use the Okay I will show you the code
41:00 - 41:30 now we go back to the code and um so what did I took i took the uh average as neutral level of interest rate i took the average of the one-year uh real rate okay so you take the one-year Treasury uh real yield i took the average of the historical time series and I have this 0.76% then in this uh in this instance I've used
41:30 - 42:00 2.38% which is the most recent data of core inflation i set my pi target my neutral level target inflation 2% the past quarter real GDP was 2% and I have used the code with the AI presscode filter to calculate the potential output potential real GDP you can see here the forecast it's more or less around two and a half% and I add another iteration
42:00 - 42:30 before before my method is very very because potential output is in the low back William it's calculated in a completely different manner and not so many other economists which are a million times more uh important and much better than me they have so well but these are the data for the year 2000 and this is a that's the I mean the the the code gives me another output So the uh you see the green line is the
42:30 - 43:00 audi press filter and it already tells me that 2024 going into 2025 we have a uh a somewhat of tiny negative output which can be reflected here as well so I could basically yeah it's is we see here forecast potential it's 2 and a half the historical so the odic presscode filter it it it
43:00 - 43:30 h it it it calculates sorry about that it calculates uh extrapolates from the historical real GDP time series the historical potential real GDP the trend and so the green line is based on historical data the uh the the gold dash line is based on the also the forecast that is derived from calculated with the odric the HP filter um so theoretically I could um use the
43:30 - 44:00 3% and uh see what is a negative output you can do all the stuff so that's how I calculated the potential output I just use a an HP filter or presc filter to real GDP so I didn't do any particular stuff and what I implemented uh was a uh first four models of um this is real uh PCE real personal consumption expenditure so gash 111 eash 111 uh t
44:00 - 44:30 gash 111 ach1 and um yeah uh so I have the um historical conditional volatility table so I have I can see the the the most recent the January conditional volatility or personal consumption expenditure and then I have to double check with the the P values and the parameters of the um the models the T garch models what are the resulting parameters and then I used uh this CPI which is core CPI and I
44:30 - 45:00 I repeated the same GACH ech1 echar they are all one one Okay so this is also another nuances but and then I have to double check what are the p values what is statistically significant and I use tarch I can just I can say that the most reliable are garch and tar well garch1 ech and tararch but the
45:00 - 45:30 most reliable parameters to me are earch and darch ach is not a good model so I will not use it so going back to Taylor we have uh past quarter to real GDP 2 and a half% potential GDP 2 and a half% then the tar uh the latest conditional volatility parameter is this one you see it generally know uh four quarter 2024 tar 1.12 conditional vault and the most
45:30 - 46:00 recent parameter of GDP it's 0.687 0.68 68 or something and so the the you see the result here the nominal uh interest rate uh Taylor rule is 3 uh 57% and this is based on the average oneear real yield why I took the one year because in um as I said in my previous videos in many uh monetary
46:00 - 46:30 policy books it's explained that the the most um the most accurate measure of what is the um monetary policy is the oneear yield so we know that um monetary policy sets the level of interest rate for short-term papers can be 30 days 60day 90 days um uh short short-term bonds short-term
46:30 - 47:00 notes so it's the one month three months six months short-term u t- notes or I don't know the one month three months six months jerber for the euro area and those those level of interest rates they are all linked to the interest rate tool of the central bank so what what what is uh according to what is the level of interest rates that sets the
47:00 - 47:30 central bank like the sulfur for the federal reserve the one month three months six months they they basically mirror the level of interest rate of the central bank unless there are some other exogenous factors or risks in the that I cannot cover now uh according to uh monetary policy books what is the most uh approximate most precise measure or what is the monetary policy cycle to project also the the the effect of
47:30 - 48:00 monetary policy on um uh aggregate output and on inflation if there is an output gap the the the the yield the duration to use is the one year the benchmark is the one year so with the one-year yield uh the the Taylor rule using these parameters is 3.57% and we know that yesterday the Feders have just stood at 4 uh 33% they didn't cut interest rate
48:00 - 48:30 however I have another uh nuance okay I will show you now i will show you now i will show you now so uh if I uh if I were to train I'll be late okay okay i will show you another table by chance bear with me this is Waba this is tremendous so you cannot see here real uh interest rate one year 10 year one month okay these are all the
48:30 - 49:00 time series and I took the average okay I took the average of this so the average real yield for the 10 year is 1.78 so if now I for the neutral level of interest rate I put 178 i have to run the code again fingers crossed chs fing fingers crossed yeah we got the results here 4.59 okay which is very very close to
49:00 - 49:30 um to the federal reserve which is 4.33 so according to what is the uh the duration what is the the benchmark that we use that I am using for the neutral level of interest rate uh not the neutral level yeah the the parameter for interest rate which I use which parameters I I prefer is the one year real yield real yield average or the the 10year real interest rate I
49:30 - 50:00 to I take the average and I find the parameter depends if you take the average from 19 n 1950 it's a number if you take the average for from 1990 or from the year 2000 it's another number so it's a whole raft of things that's why but just on a broader measure if I input the average 10ear real interest rate which is
50:00 - 50:30 1.78% then the tailor rule equilibria is 4.6% so the Federal Reserve should hike by 25 basis points arguing that the inflation output arguing this that the inflation output and the real GDP output uh uh the inflation gap mind the gap mine the gap so yt gap
50:30 - 51:00 and pi gap they are multiplied by a parameter which is the uh conditional volatility of inflation and the conditional volatility of real GDP now something that I may I'm not aware of okay basically the the the original alpha and beta parameter that are in the tailor rule the normally the economist at the central bank they already use the standard deviation of volatility fine no
51:00 - 51:30 problem I'm just showing you my my work I don't mind so for all of you that are watching this video I hope you are interested and interested I hope you you like the video just subscribe subscribe subscribe please follow me no problems okay now Um I we can just try to play around things okay let's say we we we take historical trend and we want to say that there is a negative output gap oh so we have a parameter which is totally
51:30 - 52:00 bonkers so we cannot have a negative output output gap so that's why the the formula needs to uh to be refined um okay we can you try and use the earch model okay so if I take the earch conditional volatility of core inflation uh which is
52:00 - 52:30 uh the arch 1.015 okay so let's change this to 1.015 then I have to go back up and find the GDP real GDP um Garch models which they will be somewhere bear with me chs i think we got it we got it conditional volatility real GDP real GDP potential output no yes no but no yeah but no yes but no but
52:30 - 53:00 yeah but no real GDP oh my god i'm sorry i uh I haven't prepared all of these um things bear with me champs bear with me bear with me bear with me we will find real GDP somewhere pci oh come on where is this real GDP where is the real GDP where is real GDP where is the real GDP parameters
53:00 - 53:30 okay gdp okay condition wall PC i'm bewildered i should have um made sure that I had the data pronto presto pronto like voila and this is the omega the beta no because it works in another way
53:30 - 54:00 parameters oh my good lord okay this is GDP okay hallelujah 0.545 okay allelujah chance are you okay so a lower conditional volatility let's run the code more or less the same is that possible i don't believe
54:00 - 54:30 so yeah more or less the same let's use that's why I have to refine my code okay got the same result even if I'm changing the uh volatility around no but I haven't changed the uh tart no no no one second one second chance one second 1.01 i haven't changed this parameter because basically if the uh the output cap is zero so the this
54:30 - 55:00 volatility parameters it doesn't do any good yeah okay so still it's 3 and a half% with the one year real yield average and uh it will be 4 and a half% with the 10ear yeah even if I change the conditional volatility parameter now if I have a positive output gap let's see what is the result if the machine is able 18% so
55:00 - 55:30 the model needs to be calibrated somewhat because Oh yeah this is huge is that real is that even possible 17% that's why it's so the output cap has to be zero for this thing to to work because otherwise it won't work anytime I have a um let's
55:30 - 56:00 see 2.6 2.7 it's huge it's really huge if I have a negative output gap of uh just minus 0.2 then the t garch parameters is 0.5 which is very similar to the the basic tailor root parameter then it would be 0.5% so that's why um I'm not really convinced about what
56:00 - 56:30 is this formula that the economist tailor put in place but anyway nevertheless if we change around the now I I won't I won't hold you longer but basically if we change around the the inflation parameter from um core inflation to core PCE core personal consumption expenditure
56:30 - 57:00 then the the level of interest rate should be much higher because core PC the latest data it's a very hot core PC yeah I have it here um sorry I'm I'm checking the okay so the latest core PC It's 3.15% okay let's write it
57:00 - 57:30 here 3.15 let's use the average one year um real yield parameter let's assume a zero output gap inflation target is two and uh I have to now go and double check what are the uh GACH parameters for the P core PC this is PC inflation or core
57:30 - 58:00 PC okay this is core PC i have the table here we are lucky chs and you can see the eash parameter is 2.62 oh let's use the tar parameter also because this a parch p values are not good the T arch model extrapolating the historical conditional volatility I have these two P values which are not so great but the gamma and VA are um statistically
58:00 - 58:30 significant same is for the EGA the omega parameter so the EGA model maybe probably fits better statistically it's more relevant uh it fits better than the tash parameter the model and the gash one model also but we see that the omega parameter here the p value is much lower than here so the optimal model would be the eosh model if I take the conditional volatility of core producer core uh
58:30 - 59:00 person core PCE is 2.62 let's see what happens to this puppet let's see what happens to this puppet 2.62 62 let's bear in mind is it's core PCE bang 6.9% 7% so if uh the last quarter Q4 2024 core PCE it's 3.15%
59:00 - 59:30 and uh basically if the Fed wants 2% real yield in money market the fed funds should be discounted just for the plain uh core PCE it should be 5.15% yeah 3% is inflation 5% should be the fed funds to have a 2% real yield on top of what is core PCE okay but if I inject this this the conditional volatility parameter of core PCE I have 6.9
59:30 - 60:00 um uh percent or even 7% uh fed fund rate okay so accounting not accounting injecting as a as a parameter into the equation the conditional volatility of inflation then the level of interest rate would be it needs to be much much higher okay so in this case if I sets
60:00 - 60:30 uh the level the fed fund rate at 6 75 to 7% let's do a simple thing if I set the level of interest rate as 6.75 if I follow this this equation the result of this equation minus core PC left 3.6% real yield on money market on money like your uh check and uh your deposit account your deposit account
60:30 - 61:00 yeah it's that would yield 3.6% 6% on any penny or dollar that which would be deposited okay but now the Federal Reserve is at 4 33 minus 3.15 which is core PC so the real is a little bit more than 1% right and uh this level of interest rate will be for savers now if I want to set the level of interest rate for financial
61:00 - 61:30 market I would use the average 10year yield because the 10-year uh treasury is the collateral is the debt security collateral per x allowance for hedge funds pension funds repo market is the plumbing of the financial markets the financial system the 10year treasury or the treasury market on a broader scale so if I want to set another level of interest rate which is only for
61:30 - 62:00 financial investments I'll run the code and I have 7.94 so I will have a fed fund so what's if I were uh if tomorrow I become the chairman or I work at the at the FOMC committee so I be I work for the Federal Reserve and I get to decide what are the level of interest rate i would say basically we start to have two level of interest rate one is for savers and borrowers in the real
62:00 - 62:30 economy and one is for savers but mostly borrowers and repo facilities in financial markets what I will do i will take the average of the 10 year 10ear treasury uh real uh interest rate and I will take a parameter we'll work out the parameter and then basically I will take the core PCE core personal consumption expenditure because GDP in the United States is
62:30 - 63:00 measured by consumption not only by um uh the level of inflation although you can use core inflation sticky prices you I don't know whatever you like so let's say core PC I set a target of 2% and I will have to work out uh better what is the uh output gap and then I will take the earch conditional volatility parameter of uh core PCE and
63:00 - 63:30 the earchch conditional volatility or tar conditional volatility parameter of real GDP i will have my nice equation and with the 10 year the average 10ear yield I will set the level of interest rate for financial asset for uh for the financial system to 8% and for American savers and borrowers I will set the level of interest rate to six uh and 3/4 to 7% okay otherwise I
63:30 - 64:00 can choose to use the um what is the uh core inflation measure let me go back on because I have uh um I have this I have this data all these excel and I have to find the uh CPI somewhere CPI so this is core PC let's see if it's here
64:00 - 64:30 yeah I think it's here probably somewhere i hope so pc okay this is core inflation okay so core inflation the average core inflation in the past from 1998 to 2024 is 2.38% okay so instead of using core PCE I use core inflation 2.38 that's work out 4% but then I'll have to change this one to
64:30 - 65:00 1.15 it's three and a half% okay because the conditional volatility parameter is not core PC but it's core inflation okay so what to do i personally I would use the core PCE okay and I will take the um to have a more restrictive level of interest rate and I will use the EGA parameter 2.62 [Music] 62 okay then I will simulate also with
65:00 - 65:30 the tash parameter which is uh 0.58 so this is 2 2.62 let's run the code again and 6.9 but if I take six 6.75 to 7% for the real economy and 8% for financial market so I will have two level two sets of interest rate two sets of fat funds one is the sofur and another one is the um
65:30 - 66:00 another is the sofur for financial markets okay and just making it very very simpler because then there are already many other level of uh borrowing rates which is the river rate and then the sulfur has an upper limit and a lower limit just to give you a broader idea uh what I will do I will have two level of interest rate one for based on the 10-year average uh real interest rate which is
66:00 - 66:30 1.78% and this benchmark would be only for investment banks hedge funds etc etc and the like in the stock market and another level of interest rate which is for the real economy if the average uh grocery store wants to borrow that would be the average level interest rate and that's my uh that's all folks that's my theoretical model of uh Taylor rule so
66:30 - 67:00 there rule again just to wrap up the um neutral level of interest rate which can be the 10ear uh average real yield for uh banks for financial institution or the one year real yield for the uh sar rate which is for ordinary borrowers in the economy sorry about that and then I would use the conditional volatility of uh core PCE core personal consumption
67:00 - 67:30 expenditure the inflate mind the gap the inflation gap of core PC plus the conditional volatility of real GDP and the potential the the potent the output gap of real GDP that's how I do it just for academic uh work uh for uh study if you have any suggestion if you want to teach me everything about the Taylor rule please do so because I always need
67:30 - 68:00 to learn and uh I hope I will be back soon with more material i could continue now the video for for a lot longer because I have a lot of simulation about what can be the theoretical impact of of taliffs i will show you now only the uh ARMA and SARMA models for certain uh import prices uh
68:00 - 68:30 index bear with me jumps one second and uh oh that's the OS okay I think we got here yeah okay so we asked the machine I have a CSV file with uh where I took uh import prices import prices of uh cars import prices of car car parts uh import prices of all commodities and
68:30 - 69:00 um fit a seasonal ARMA and SARMA model optimized with the first difference up to five and uh add on top a dummy variable there must be a dummy variable somewhere uh loop through create forecast set frequency ah okay add you see here add dummy variable uh tariffs so there should be a dummy
69:00 - 69:30 variable worked out but nevertheless because I specified 25% variable uh this should be 25% yeah start from January 2025 yeah 25% imports okay so this the the Python code should work more or less probably so uh the sarma with tarif so this this one uh just bear with me chs i will tell
69:30 - 70:00 you so this one is the consumer price index uh of used car and trucks on average for all US cities and this specific measure of CPI of use car and tracks theoretically just for the iteration of the of this historical data with an additional dummy variable of 25%
70:00 - 70:30 import it shows a line going up to 10% and well this is the same of eight quarter forecast so you have what did the the the autogressive in integrated moving average model tells me is that there is a there should be an initial shock inflationary shock applied for example on used cars and trucks the same is for this one this PCU uh it's
70:30 - 71:00 um it's producer price index of new car dealers so the producer price index of new car dealers also could see an inflationary shock of well above 10% 15% and the eight quarter forecast shows the subsequent decline but in the first four quarters just starting from Q1 2025 if I
71:00 - 71:30 uh apply a you see tariff starts January 2025 a dummy variable of uh fixed 25% tariff then the the the output of the machine it's an inflation shock theoretical inflation shock this time series is um um consumer CPI for all urban urban consumer for new and use used uh motor vehicles for US CD average and there is a bump another inflationary shock going
71:30 - 72:00 up to 2 and a half% and uh yeah this is the same producer price index consumer price index of new juice bagels uh US CD average this one there seems to me carabal cap it's not a carabal cap it's not carvana what is it is consumer loans so other consumer loans automo loans or commercial banks billions of dollars seasonally adjust this is the this would
72:00 - 72:30 be the percentage change year on year and the machine shows a theoretical uptick in uh consumer loans this is total sales total sales will be basically sort of flatlining in foreign headquarters even negative maybe negative impact at the beginning uh this is clearly automotive or something like that so this is this this acronym is uh
72:30 - 73:00 manufacturers new orders of motor vehicles and parts so new orders of motor vehicles and parts it should be that's the the the forecast it seems pretty flat to zero but uh I will we will see the um the table the table just in a bit these are tracks as we can as I can see here
73:00 - 73:30 where is it where is it where is it where is it h trucks i don't know uh yeah this must be something related to drugs i'm sorry um bear with me chs bear with me bear with me bear with me import prices um okay so um bear with me bear with me bear with
73:30 - 74:00 me well anyway nevertheless the initial impact should be negative and then in a positive percentage change here on here or tariffs okay I will tell you in a second because I'm searching the acronym exactly what it is track a AR options truck oh okay so this these are ah okay okay okay so these are motor
74:00 - 74:30 vehicle motor vehicle sales of what h heavy trucks okay so the motor vehicle sales of heavy trucks it seems to me that it has a negative impact and then bounces up like normalizing absorbing the shock okay i should have I should be able to see the uh oh so these are import prices and nevertheless it should be like impacting more or less import prices these are
74:30 - 75:00 import prices of um import prices [Music] uh so IR it's import prices for all commodities and it should be more or less uh in line with the trend but still um positive import prices these are import prices just of um
75:00 - 75:30 automotive vehicles and parts and the forecast starts from one so like a negative shock i don't know why and then it adjusts a little bit upward this is the eight quarters forecast so there is some random shock for import prices of and this is these are uh sticky prices excluding energy food and shelter and we don't have a particular shock here
75:30 - 76:00 inflational shock on derived from tariffs and this one it's auto so it's um uh retail sales uh of autos or vehicles cars whether it's domestic cars or imposter cars and it seems that it's declining this it doesn't show me some particular shock that derives from a dummy variable which is tariffs and this m are something it's uh
76:00 - 76:30 retail sales for according for um automo dealers so there is this seems to me a sort of initial shock because the line starts from zero and then bounces up again so the dummy variable as an initial shock uh um immediately when the tariffs come in place like for automo for all the car dealers and the import prices some are very large shock also the prices of used cars or trucks or new cars maybe they
76:30 - 77:00 could be an inflationary shock on that front well these are really interesting because I expanded for all the and okay so you can see the just the numbers okay so the numbers are very interesting so uh this one again it's the consumer price or consumers on average just see this of used car and trucks and the dummy variable brings out some very large
77:00 - 77:30 inflation shock 4% 8.3% 10.7% 4.3% like the persistency of the inflationary shock this one it starts very little but then it grows exponentially and it's um the producer price index of new car dealers so the the inflation shock of tariffs to new car dealers could be as high as 10 to 16% which is seems to me uh I don't know
77:30 - 78:00 reasonable unable I don't know what it seems to me but that's what the machine does this is the uh CPI a new and used mode of vehicles and you have an initial uh negative shock and then some sort of average cost very contained carab oh okay these are that's the issuance of consumer loans which would be negative in the first quarter but then you have let's say that the machine derives that
78:00 - 78:30 the shock is absorbed and you have issu issuance of um car loans by 1.3 1.8 1.9% quarteron quarter so assuming that tariffs go in place in uh 1 of January for total sales you can see here you have an initial shock of minus4 75% but because tariffs like cars and parts that go in and out of Mexico or Canada or from wherever come from Europe
78:30 - 79:00 or Japan tariffs they go in place in Q2 in the second quarter so this shock would materialize I think in Q2 Q3 and here I have a the the fall in total sales is minus 4.7 then normalizing to two then you flat like 1% and then after three quarters it balance out the initial shock yeah this is uh that's uh automo sales or something very
79:00 - 79:30 similar total sales oh that's a manufacturer new order so if the tariff shock is in Q1 you have an initial shock of minus 4% so new orders of of new dealer or car dealers could contract by 4% uh as a consequence of an initial shock of import tariff for example on cars and then the shock normalized and is absorbed then every track they have two quarters of shock minus 7.2 to a minus
79:30 - 80:00 5% and then it it does normalize because these positive percentages they don't absorb the whole shock and these are import prices so all commodity import prices is this uh that's import prices for uh automotives uh new outs and cars so marginal uh inflationary shock on import prices this is sticky prices and there is no no
80:00 - 80:30 shock to see here then that's um all those um something related to motor vehicle sales yeah so that's retail sales of cars produced in United States or car imported from outside the United States and you have retail sales could decline by three quarters in a row so if I have 20 25% import types as a dummy variable as a fixed dummy variable and iterates
80:30 - 81:00 through the ARMA and the SRMA model even if you use it on a OS regression then the outcome the the dependent variable which is retail sales of cars it shows that it has negative shock minus 7% on the first quarter thereafter tariffs kick -1.9% you can see the parameters here - 5 and a half so retail sales of cars should theoretically could collapse in
81:00 - 81:30 the following three quarters and then you have a marginal absor absorb absorption of these things which is 0.7 what what's what's this what's this what's this what's this what's this okay reader sales in million dollars not seasonally adjusted so this would be positive but it's measured by millions of dollars so it's somewhat contradictory of this
81:30 - 82:00 one but let me clear up okay okay okay okay so um that's a time series that measures the millions of units so what happens is exactly what a 25% impost um consequences are that the number of cars of units uh or cars sold would
82:00 - 82:30 collapse by 7% 1.9% and 5 and a half% but the millions the retail sales b uh measured um according to the monetary uh quantities in in millions of dollars then you have an inflationary effect of 7% 5% and 7% again sort of inflationary effect so the amount paid would bump up of course with the uh with the tariff 25% tariff but the the aggregate amount
82:30 - 83:00 number of units of car sold would be less would be negative although it's basically it's totally an inflationary effect because the monetary amount money uh would inflate um just because of only of the 25% tariffs and these are real interest rate and we are not interested in this and there are also the headquarters forecast but I mean my aim is you see that on the eight quarter forecast you have huge inflationary
83:00 - 83:30 spiral of these things so um only by doing a no regressive integrated moving average uh work and applying a dummy variable to the regression the machine works out inflationary shock on import prices on consumer prices for uh new car used cars for trucks uh for air tracks and uh import prices they have some sort of
83:30 - 84:00 um inflationary shock what also derives is that you have a decline of sales total sales of number of units here this is the LA A2 so it's the number of units of cars could decline by three quarters in a row total sales also will decline and let me just sorry I want
84:00 - 84:30 to so every truck sales automotive sales or total sales you all see here every trucks can decline by two quarters in a row automotive sales they have an immediate impact of minus4 minus 5% and what happens is that the number of units of cars um measured by retail sales in the economy whether is domestic cars car produced in the United States or car that are come into the United States or
84:30 - 85:00 parts of Vegas that come into the United States nevertheless the whole amounts of units will decline can theoretically decline by minus 10% minus 1.9% minus 5.5% but at the end of the fairy tale of the tale at the end of the fair at the end of the all the circus the amount paid would still grow by 7% 5.75 and 7% that's the work the machine does and
85:00 - 85:30 um thank you very much all for listening to me i hope you enjoyed this content please watch my video and I will be back soon with um this uh two works that I that I have here on um imports prices tariffs and uh um econometric forecast and projection all of all the microeconomic variables for the United States economy thanks a lot to all the big for me ches