Saturday, August 22, 2015

Monetary Policy and Bicycles

Nick Rowe does a great job with mechanical analogies for monetary policy.

Scott Sumner mentions Rowe and New Keynesian and Neo-Fisherism and then links to a video about someone who put tremendous energy into learning to ride a bike with reversed steering.   Scott found it linked by Tyler Cowen here.   Here is  link to the video.

I can't begin to link all the relevant posts by Rowe.   The video really relates to many posts about how the conventional wisdom today for central banks is that they need to lower nominal interest rates to raise inflation and raise nominal interest rates to raise inflation.   Monetary policy in new Keynesian models has traditionally followed that conventional wisdom exclusively.

With neo-Fisherism, a higher nominal interest rate is associated with higher inflation and a lower nominal interest rate is associated with lower inflation.   Therefore, couldn't it be that when central banks raise their interest rate target, they cause higher inflation?   Could it be that the low interest rate targets set by the Fed for the last 7 years is why inflation continues to run below the Fed's target of 2%?

The video is about a bicycle constructed to go left when the ride turns right and right when the rider turns left.   It is about how difficult it was for him to learn to ride the new bike.

Rowe has argued that the conventional view that the way to raise inflation is to first lower the nominal interest rate seems convoluted.   This is especially true when the higher inflation will later require the central bank to raise its target for the nominal interest rate.  

Those, like Rowe (and I) who have never accepted the new Keynesian approach would point out that a more rapid growth rate of the quantity of money may well result in a lower nominal interest rate in the short run, but that the long run effect is a higher inflation rate and a higher nominal interest rate.   If the short run "liqudity effect" on the interest rate were to not materialize, say because of anticipation of inflation or rapid growth in real output, it would not be of central importance.   A possible, transitional effect does not appear.  So what?   Josh Henderson has a good post along those lines.   The "problem" with neo-Fisherist results in a new Keynesian model is a reason to believe that the new Keynesian approach to modeling is problematic.   If the Fed expands money growth, even if this does lead to a temporary decrease nominal interest rates, it won't result in lower inflation.    And if the more rapid money grown results in immediately higher nominal interest rates, that won't result in lower inflation either.  

But perhaps most relevant is Rowe's post about how it is all about communication.   If the Fed raises interest rates and everyone thinks this means the Fed is trying to stop inflation, then inflation will fall.  But if the Fed raises interest rates and everyone thinks this is due to a new inflationary policy, inflation will rise.

And even more relevant to the bicycle experiment is David Glasner's post about central bankers having a couple of centuries of gold standard experience to narrow their perspective--that is, they learned to ride a "normal" bike.   In that world, they were trying to keep their own liabilities redeemable in gold.   Raise interest rates to attract more gold.   Lower interest rates (if you want) because you would rather hold earning assets rather than gold.   The price level and inflation rate depended on the world supply and demand for gold.  

And after the gold standard disappeared, we are now suffering through the efforts of our central bankers to ride a new type of bicycle--one that determines the value of money.  

My solution is to constrain central banks so that they are no longer responsible for determining the value of money.    A nominal GDP level target determines the price level.   A central bank (or a free banking system) subject to an nominal GDP level rule would no more be in a position to use the neo-Fisherist approach than a central bank (or free banking system) subject to gold redeemability.   The inflation rate necessary to return to target is tied down, so if the rule is credible, so is the expected inflation rate.      

Monday, August 3, 2015

NBER Working Paper on the Desirability of NGDP targeting.

On the Desirability of Nominal GDP Targeting

Julio GarĂ­nRobert LesterEric Sims

NBER Working Paper No. 21420
Issued in July 2015
NBER Program(s):   EFG   ME 
This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.

Wednesday, May 27, 2015

Asset Price Inflation

Larry White mentioned that Alchain and Klein showed long ago that the measure of the purchasing power of money should include asset prices.

I don't agree.

I strongly agree that it is a mistake to measure the purchasing power of money solely by the prices of consumer goods and services--the CPI or CEP.

But I don't think that the prices of financial assets should be included in a measure of inflation.

As for real assets, I think that only the newly-produced ones should count.

In other words, I think that the GDP deflator, or something like it, is the least bad approach to measuring the purchasing power of money.

First, consider equities.   If we assume that a share of stock is a claim to a fixed quantity of goods, then any increase in the price of a share would imply a lower purchasing power of money.   However, suppose that a company is expected to become twice as profitable.   The price of  a share would rise, but it would not be a higher price for the same quantity of future goods.   It would be a higher price for a higher quantity of future goods.

Now, suppose the market interest rate should fall, and the lower discount of future returns results in higher prices of equities and existing long term bonds.   Superficially, the purchasing power of money is less.   It is necessary to pay more for the same quantity of future goods.

However, suppose we lived in a world where the only saving instrument was a saving account.   There is no possibility of capital gain or loss on financial assets.   If the interest rate should fall, then it ia true that money put into a saving account will provide less future consumption.   But is that a lower purchasing power of money?   Saving or accumulated wealth now generates a lower nominal and real income.    Is that a higher price level?    I don't think so.

I guess my thinking on the subject is very much influenced by some sort of presumption that  inflation is bad and the monetary regime should be stabilizing the purchasing power of money.   And so, I would ask if a monetary contraction would desirable to force down the prices of consumer goods and services enough to offset the increase in long term bond prices.   I don't think so.

The coordinating role of the lower interest rate is to raise the demand for both  consumer goods and services and capital goods.

For example, suppose there was an increase in saving supply.   The direct and immediate effect is a lower demand for consumer goods and services.   The coordinating role of the lower interest rate is to increase the quantity of consumer goods and services demanded as well as the quantity of capital goods demanded.    The result is what returns saving and investment back into balance.

I certainly grant that it would be inappropriate for this reallocation of resources to occur with stable prices for consumer goods and services.   Lower prices of consumer goods and services along with higher prices of capital goods should be expected.  

Now, the lower interest rates should result in higher prices of all the existing capital goods--not just the newly produced ones.   This doesn't require anyone to spend any money on all of these capital goods.   It is just that entrepreneurs will be willing to offer more money for them and those using them now will insist on a higher payment to part with them.

Should the weighting of capital goods in the price level depend on all of the capital goods or just the newly produced ones?

Suppose consumption is $8000 billion and investment $2000 billion.   The capital stock, however, is $20,000 billion.    There is an increase in saving and a $200 billion shift in demand.    Suppose that this 2.5% decrease in demand for consumer goods results in 1% lower prices.   However, the 10% increase in the demand for capital goods requires 4% higher prices.    If we look at only currently produced goods, the price level remains the same.    But if all of the existing capital goods count, then there has been a very substantial inflation--about 2.5%.

Would it be better for the prices of  consumer goods to fall more and the increase in the prices of capital goods to rise less?    What would this be signalling?   That the production of consumer goods and services should be reduced by more?   That the expansion in the production of new capital goods should be less?

Presumably this would require that wages be reduced to return to equilibrium.   Why?   Is this signalling that people should work less?

In my view counting stock prices is more or less the same thing as counting the prices of existing capital goods--in theory.

In reality, is it really the best that if stock prices go up,  there is a deflation of consumer prices along with money wage cuts?   What is the point?   Do we need to get people to work less?   Or is it just to free up resources from the production of consumer goods and services to print up more shares of stock?

As for bonds--as old bonds mature and new ones are issued at par with lower coupon rates, does that count as deflation?    The "prices" of bonds are falling.   Should consumer prices and money wages rise to offset that deflation?   Clearly they should not.

Now, perhaps Alchain, Klein, and White have no presumption that the purchasing power of money should be stabilized.   If more saving supply or reduced investment demand results in a  lower natural interest rate, then that just lowers the purchasing power of money--and there is nothing bad about it.   Maybe.

And I must admit, I don't favor a stable price level of any sort, but rather a stable growth path for spending on currently produced output.   However, I do favor a growth rate of spending that is consistent with the expected trend growth rate of potential output.   And so, this would tend to result in a stable price level for currently produced output.  (And I know White does not favor stabilizing the price level, especially when there are changes in productivity.)

But it wouldn't tend to stabilize the prices of current output and existing capital goods and financial assets all together.

And it shouldn't.   Or at least, I don't think so.

Saturday, March 21, 2015

Are Open Market Operations Distortionary?

Many of my fellow free bankers agree that when banks accommodate changes in the demand to hold their monetary liabilities, the result is equilibrating and nondistortionary.   However, they believe that when a central bank adjusts the quantity of base money to accommodate changes in the demand for it, there is something problematic with the process.   The injection of base money is somehow distortionary.

Now, I don't want to claim that this could never be a problem.   The Fed's policy since 2008 has most certainly become very distortionary--intentionally   Perhaps there should be no surprise that the Fed has attempted to funnel money into housing.    Using government interventions of one sort or another to promote home ownership has been the norm for  nearly a century now.

Still, let us suppose that the government has a national debt because of past wars but that it now balances its budget.    The central bank always adjusts the quantity of money by buying and selling existing government bonds.  

If some household chooses to save by spending less on consumer goods and instead purchasing government bonds, then the result is a higher price of bonds and a lower yield.   The increase in price and decrease in yield has to be sufficient to persuade someone to reduce their holdings of the government bonds.   The most likely result is that those least attached to holding government bonds purchase some other sort of financial asset.   That results in higher prices and lower yields on those assets.   The final result is a decrease in the amount saved and increase in the amount invested.   This is an expansion in spending on consumer goods that only partly offsets the initial decrease and an expansion in spending on capital goods.  

An increase in supply creates a surplus at the initial price, but as the price decreases, quantity supplied decreases and quantity demanded increases returning to an equilibrium where quantity supplied and demanded are equal.   The price is lower and the quantity is higher.   Apply econ 101 to saving supply and investment demand.

While the existence of this national debt requires that interest be paid and so taxes collected, I find it difficult to see how the individual saver who purchases these bonds has created some kind of distortion.   While the result is unlikely to be exactly the same as it would have been if that household had saved by purchasing some private security--stock or bond--we can hardly expect that such purchases would have directly funneled resources into the firms that issued those particular securities.   The process of coordinating saving and investment occurs through adjustments in financial asset portfolios and interest rate signals that result in an appropriate decrease in the quantity of saving supplied and increase in quantity of investment demanded.

Now, suppose that instead of purchasing government bonds, the household that initially saved accumulated central bank issued hand-to-hand currency.   Income was earned and not spent on anything.   Paper notes are stuffed into a safe-deposit box.     Further suppose the central bank makes a standard open market purchase.   It creates new money out of thin air and purchases government bonds--just accommodating the increase in the demand to hold money.

The result after that point is exactly the same as what would have happened if the household had directly purchased the government bonds.   As explained above, this results in appropriate adjustments in the price and yield on those government bonds and on other financial assets such that the amount saved and invested adjust to coordinate the increase in saving.    Further, there is no significant difference as far as the adjustment to this additional saving than would have occurred if the household had purchased privately-issued stocks or bonds.

Given the dominant Keynesian (old or new) framing, a central bank that accommodates an increase in the demand to hold base money by expanding the nominal quantity issued through open market purchases of government bonds would be described as lowering the interest rate to stimulate consumption and investment spending.   The market coordination process to an increase in the supply of saving leading to lower interest rates and so a readjustment in the quantity of saving supplied and increase in the quantity of investment demanded is twisted into some kind of intervention by the Fed -- pushing interest rates too low in order to unnaturally stimulate spending.   That is an inappropriate framing.

Now, I will surely grant that the potential for a central bank to create an excess supply of money is much greater than that of private banks issuing any sort of money, and especially money redeemable in some other form of money currently being used.   My point is simply that to the degree a central bank limits its issue of new money to the amount demanded, there is nothing especially distorting about the process.   It is coordinating.   The proper comparison is not what would happen if the nominal quantity of money remained fixed and there was a deflation of prices and wages.  Nor is the proper comparison to what would have happened if there had never been an increase in the supply of saving.  The proper comparison is what would happen if there was a increase in the supply of saving by purchasing government bonds.

With an ordinary fractional reserve banking system, an increase in the demand to hold bank deposits is directly an increase in desired lending to a bank but indirectly funding for whatever projects the bank finds profitable.   That is the nature of the contract between bank and depositor and the logic of financial intermediation.    Similarly, an increase in the demand for base money under a monetary regime where the central bank makes ordinary open market purchases is directly a loan to the central bank, but indirectly a loan to the government.   If the government is balancing its budget, then the effect is simply a coordinating expansion in other sorts of private spending.    At least, as long as the central bank limits its issue of money to amounts that people choose to hold.

Friday, March 20, 2015

Salerno on Market Monetarism

Tom Woods and Joe Salerno explain what is wrong with Market Monetarism.

The most glaring error is Salerno's claim that any increase in the quantity of money pushes the market rate below the natural rate of interest  because the new money is injected into credit markets.   However, an increase in the quantity of money that matches an increase in the demand to hold money rather keeps the market interest rate equal to the natural interest rate.   If saving occurs by accumulation of money balances, then the natural and market interest rates decrease.   If instead, the added money balances are accumulated by reducing spending on capital goods or other financial assets or even selling capital goods or other financial assets, then the natural and market interest rates remain unchanged if newly created money is injected into credit markets.

The oddest portion of his argument is the admission that prices and wages are sticky but that this is OK because entrepreneurs can choose to adjust them if they want.   There was a rather odd notion that these are small little blips.   Well, I suppose some of them are minor and don't make much difference.  It is when a large change in the demand to hold money leads to a large change in market clearing prices that sticky prices and wages result in large changes in output and employment which are serious problems.

Also, the entire discussion carries on ignoring a decrease in the demand to hold money.  Market monetarists favor a decrease in the quantity of money in that circumstance.   The Salerno view is that the inflation (or reflation) of prices is harmless?   Entrepreneurs just need to take care of it?

Anyway, the key question is what sort of monetary regime is best.  Is it better to have a monetary regime that requires changes in the price and wage level so that real money balances adjust to the demand to hold them given a fixed nominal quantity of money, or is it better to have a nominal quantity of money that adjusts with changes in the demand to hold money.    While price and wage adjustments are still necessary to coordinate economic activity, they aren't necessary to provide for monetary equilibrium if the nominal quantity of money adjusts to changes in the demand to hold money.

Salerno also suggests that entrepreneurs should not be treated as fragile flowers unable to maintain monetary equilibrium.   "Unable" shows an unfortunate tendency of some Austrians to confuse sticky with stuck prices, and really, to continue to fight past battles regarding long run unemployment equilibrium rather than what is really at issue--whether sticky prices and wages result in temporary fluctuations in output and employment that are both painful and avoidable.

Again, the issue is what monetary regime is best.   One key issue is specialization.   Entrepreneurs specialize in particular products.   The requirement that everyone set their prices and wages to make the real quantity of money accommodate the demand to hold money balances requires every entrepreneur to specialize in two areas--the production and demand for their particular product, but also the production and demand for money.    (One of the goals of index futures convertibility is to allow some entrepreneurs to specialize in maintaining monetary equilibrium.)

The argument that I found most challenging is Salerno's claim that spending has no causal significance.   I think his description of the market process where buyers and sellers first negotiate a price and then choose the amount transacted and so spending is a bit off.   Though in another passage it seemed to be suggesting that prices and quantities are jointly negotiated--I want 3 units at $2 each.   Well, I will sell you 5 units at $1.50 each.   That this involves expenditure of $6 or $7.50 is of no causal significance.

Well, perhaps I am an unsophisticated consumer, but I operate on a relatively fixed nominal budget constraint.   My income both recently earned and expected in the near future is an aggregate nominal amount.   And that constrains my total spending on goods and services.   How much I can spend on this or that good or service must add up to what I have available to spend.   I care about how much of each product  I get, but what I spend on any one purchase is what determines what I have left to spend on other stuff.

My vision of the market process is each firm setting both its price and production.  And the nominal value of the firm's output is found by multiplying that price and quantity.   That is added up for all the firms to get the aggregate value of output.   Of course, service firms, which play too small a role in my vision compared to their actual role in the economy, involve choosing a price and then producing what is sold.

Still, I do think that anticipated revenues from this output and pricing decision is very important to firms.  Revenue is what they will need to cover costs and generate a residual profit,.   It seems to me that nominal sales, and especially, expected nominal sales do play a key role in entrepreneurial decisions.  

Now, suppose we have two individuals who are self-employed, consuming part of their own product and then bartering the excess for the product of the other.   I think it is fair to say that the amount of money earned and the amount available to spend would hardly matter.   It is a barter economy after all.   Isn't this Salerno's bargaining economy where "spending" means nothing and it is all about the scale of values?

In a monetary economy where people consume close to nothing of what they produce and instead sell nearly all of it to fund purchases, how much money they earn, and more importantly, what they expect to earn, means something.  In the two person barter economy, the key question is how much corn do I eat and how much will I trade for beans which I will then eat.  In a money economy, I sell my corn for money and then that money income determines how much I can spend on a huge variety of goods and services.    How much revenue I get from selling my corn is very important.    And if I am actually paying for seed corn and fertilizer and making payments on my tractors, how much money I will make from selling corn is more obviously important--it determines the residual, which will be how much I can spend on a variety of consumer products for my own use.

To me, it is obvious that it isn't the Market Monetarists who are foolishly assuming that we can separate the real economy and the monetary economy.   Our emphasis on spending on output and nominal income clearly shows that we consider the role of money in the market process very important.

Finally, suppose that the economy is made up of a gold miner who uses most his gold to fill his teeth and for jewelry.   He trades some for corn to eat.  The corn farmer eats most of his corn, but trades some of it for gold to fill his teeth and for jewelry.   Why is money expenditures more important in this economy than when the corn farmer is bartering with the bean farmer?

Well, it isn't.     It isn't a monetary economy, and so nominal income and expenditures are not important.  In such an economy, I don't think that the exchange of gold and corn would cause any special problems.  And I don't think that having the supply of gold be more elastic would be nearly as desirable as it would be in a world of many goods and services, where firms purchase resources such as labor and use it to produce goods for sale.  

Tuesday, March 10, 2015

Miles Kimball on the Primacy of the Unit of Account

Miles Kimball writes:
With the e-dollar as the unit of account, everything the central bank needs to do to have a nonzero paper currency interest rate can be done at the central bank’s cash window where banks come to deposit or withdraw paper currency from the central bank.
For good monetary policy, it is important that the central bank have control over the unit of account. And this e-dollar unit of account might have many of the aspects of a cryptocurrency—perhaps enough that it can be considered a cryptocurrency.
As far as private cryptocurrencies (like bitcoin) go, it is fine to have private cryptocurrencies perform the medium-of-exchange and store-of-value functions of money, but monetary policy requires control over the unit of account. So central banks need to retain control over the type of money that defines the unit of account—in this case the e-dollar.
Under an electronic money policy, 3 key things will insure that the e-dollar (or e-euro or e-yen or e-pound etc.) is the unit of account:
  • a requirement that taxes be calculated in e-dollars.
  • accounting standards that require accounting to be done in e-dollars.
  • the kind of need for coordination between businesses and between businesses and households that leads people to do daylight savings time (without any intrusive inspections of someone coming to look at your clocks)

This is good.

I was about to add in Sumner's emphasis that it is the "medium of account" that must be controlled.

However, I am less and less comfortable with emphasizing the medium of account when the growth path of nominal GDP is used as a nominal anchor.

A fixed weight of gold is the medium of account--clear.

A steel ingot is the medium of account and it has no medium of exchange function -- clear

A bundle of goods is the medium of account and it has no medium of exchange and no store of value function as a  bundle -- clear.

The bundle medium of account is practically the same as monetary regime that stabilizes a price index defined by the bundle  -- seems right.    A privatized system using index futures convertibility doesn't seem to have any alternative medium of account.

Some changing fraction of real output is the medium of account?   Not so clear.

A monetary policy that stabilizes the growth path of nominal GDP is possible.    A privatized system using index futures convertibility has nothing other than the unclear medium of account as some changeable fraction of real output.

And so back to Kimball, is it the unit of account that is the key to the monetary regime?

Wednesday, March 4, 2015

No Good Deflation?

David Beckworth commented on  a Greg Ip piece in the Wall Street Journal where Ip claims that there is no such thing as good deflation.

The Ip argument is solely based upon the preference by central banks to target some short and safe nominal interest rate.   Reasoning from the Fisher effect, the higher the inflation rate, the higher equilibrium nominal interest rates.   A lower inflation rate, and particular deflation, results in lower equilibrium short and safe interest rates.   This creates less room for the central bank to stimulate the economy by reducing those interest rates.

Ip does a decent job of describing "good" deflation.   Most importantly, he describes a scenario of improved productivity for some particular product.   He also describes a scenario where the price of some imported good falls, which from a narrow perspective amounts to the same thing.   However, I would be careful in describing lower prices of imported commodities due to a world depression as a benefit to any particular country.   Of course, as a rule, lower prices are better than lower production when demand decreases.

From a Market Monetarist perspective, Ip's argument is rather an argument against having a central bank use any interest rate target, and especially the interest rate on some short and safe debt instrument, such as the overnight lending rate traditionally used by the Fed.   If such a monetary policy approach is not robust when faced by even "good" deflation, then it should go.   This is especially important with Taylor testifying to Congress in favor of them legislating his "rule."

Sumner frequently argues that it is rather nominal GDP growth that is more relevant to nominal interest rates.   If he is correct, then as long as nominal GDP is expected to remain on its target growth path, then lower inflation or even deflation due to more rapid growth in productivity or lower import prices would have no impact on equilibrium nominal interest rates.   While Market Monetarists would hardly use this characterization, if a central bank were to determine that lower nominal interest rates now are necessary to keep expected nominal GDP on target, then they should be able to manage that despite lower inflation or deflation.

However, I am not quite willing to follow Sumner in this argument.   I agree with his practical concerns regarding the price indices used to measure inflation.   And maybe expected nominal GDP growth is a better rule of thumb for making judgments regarding expected nominal interest rates than the expected rate of change in the CPI, CEP, or GDP deflator.   Still, as macroeconomists, our goal should be understanding, and expected changes in real income and expected changes in the purchasing power of money could well have different effects on real and nominal interest rates in the future.

First, let us be clear that inflation or deflation in the recent past or even right this minute is irrelevant.   It is expected future inflation that should impact nominal interest rates.   Further, it does not occur through a Fisher relation equation but rather through changes in lending and borrowing behavior.   The Fisher relationship, of course, is based upon the results of rational lenders and borrowers when they expect inflation or deflation.  However, it assumes a given real interest rate.

With good deflation (or disinflation) there is an expected favorable productivity shock.   This means that real income is expected to be higher in the future.   With consumption smoothing, that should reduce the supply of saving  today.   This would result in a a higher real natural interest rate.   Further, if the expected improvement in productivity requires the introduction of additional capital equipment, then this would tend to raise the demand for investment, also increasing the real interest rate today.   For example, if we anticipate that fracking is going to generate lots of new oil, resulting in lower oil prices, we may need to be constructing various capital goods today that will be used for this fracking.

So, while a naive application of the Fisher relationship suggests that expectations of lower prices of some good, say gasoline, will result in lower nominal interest rates, the decrease in the supply of saving and increase in the demand for investment imply a higher real interest rate, which will tend to raise the nominal interest rate.   While I am doubtful that there is any reason to anticipate that the effects must be completely offsetting, there is some offset and it is at least possible that the equilibrium nominal interest rate should rise rather than stay the exact same or fall.

Consider credit markets.   The reason for the Fisher relationship is that if prices are expected to be lower, then borrowers will be less able and willing  to borrow.  The lower ability to borrow would be due to their incomes (or revenues) being less in the future.   However, with good deflation, this is simply false.   While the prices are lower, the quantities are higher.   This is where Sumner's argument is strongest.   Of course, their is also the willingness borrow.   The larger amount of real purchasing power that must be sacrificed would seem to still to be a deterrent to borrowing.

What about credit supply?   Since lenders will be paid back in dollars that purchase more, won't this motivate people to lend more?      It would seem so, but what is the alternative?   They certainly are not motivated to hold less money, since money also will increase in purchasing power.   Perhaps it is equities?   If the price level is expected to be lower, the nominal profits should be lower too, and so equities should be worth less now.   Perhaps they will sell equities and lend more.
But with "good" deflation that isn't true.  While some prices are lower, those quantities are higher.   But surely, this is just repeating the argument that the supply of saving should decrease if expected future income is higher.

Also, I find the multiple good scenario a bit puzzling.   Do people want to lend more because gasoline will be cheaper in the future so that each dollar lent will purchase more gasoline when it is paid back?   Will people be less willing to borrow now because gasoline will be cheaper in the future and so they will be giving up more gasoline in the future when they pay the money back?   It sounds so much less plausible than when there is a single consumer good and deflation means that lenders get more of it in the future and borrowers must give up more of it.      Even so, the fact that one good among many gets cheaper already implies that any deflation is less than a similar change in productivity for "the" product of the economy.

No, in the end it is best to think of the supply of saving and demand for investment as depending on the real purchasing power received and sacrificed, so that if the real interest rate changes with no shift in the supply of saving or demand for investment, the result will be disequilibrium.  With "good" deflation, there is just good reason to expect that the supply of saving decreases and the demand for investment increases, so that the natural real interest rate increases.   That the deflation raises the real interest rate just suggest that the appropriate change in nominal interest rates is less than otherwise would be necessary.