Fischer’s knowledge of macroeconomics was obtained mostly from John Lintner and Franco Modigliani. Lintner supported the Keynesian view of the economy, explaining a complex econometrics model that can simulate economic response to various economic conditions and variables. Modigliani focused more on the Irving Fisher approach, showing that the economy is a result of various demand and supply functions. Modigliani’s methods exceeded Fisher’s by providing an explicit amount of the demand for money balances and an explicit account of the money supply. Modigliani’s solution was for the Central Bank to establish a target for money supply, and penalize any wavering from that target.
Fischer Black would have heard all of this from listening to Modigliani at MIT. However, Fischer had questions and criticisms on important concepts Modigliani ignores and overlooks. In 1968 Fischer begins constructing his own views.
A for Rooster.
ReplyDeleteA big point is missed here. It is odd, but fundamental. You have, probably on your person right now, an asset that is risk free, but which pays (zero) interest — less than the risk-free rate. Why do you hold it at all?
Now, of course, money isn't completely risk-free, because there's inflation. But, we denominate all of our other investments in terms of money, so they are all subject to that same risk. So, what we normally think of as the risk-free rate is the rate before inflation.
There's a fundamental dichotomy here between objective reality, and how finance works. How can they both be true? Black decided it was because reality was away from some equilibrium that it needed to be at.