My Godley-Tobin Lecture at the Eastern Economic Association. It has turned out to be a full-throated defense of Federal Reserve monetary policy in the 2020s: moving late & moving fast has been...
Fabulous Lecture! I hope you were paid many TIPS! :)
Comments on the slides:
Does the end of secular stagnation (if it exists) have to be “foreseen”
What needed to be “foreseen” after the Putin invasion?
Types of excess demand/supply of money: Why isn’t FAIT the prescription for all four?
Isn’t “stagflation,” misaligned sticky _relative_ prices a fifth kind that for which there is indeed no monetary solution but which hypothetically could be solved by fiscal policy that alters real sectoral supplied and demand to make the sticky relative price optimal?
Is there any doubt that Bewley, suitably extended beyond the implicit 1-1-1 economy -- 1 output (“GDP”), 1 input (undifferentiated labor) and 1 relative price (the real wage) – to acknowledge other misaligned relative prices because of asymmetrically sticky prices in multiple sectors, provided the theoretical justification for Krugman?
Why did Bernanke think the Fed could not create sufficient inflation to restore full employment w/o expansionary fiscal policy?
When r < g what does a national debt do that a central bank determined to inflate cannot?
Are there any examples of capitalism having been overturned by the Lenin/Keynes 😊 policy. I think the discontent with inflation is more likely that, “My nominal income is mine and [someone]’s inflation is robbing me of part of it,”
The “Blowback” slide assumes a 1-1-1 economy. Such an economy does not need money or monetary policy. The undodgeable question only arises with multiple sectors and multiple relative prices whose failure to adjust could cause markets not to clear/unemployed resources.
Keynes’’s measuring rod argument translated:
a) Inflation insuffinet to permit the relative prices of sticky nominal prices to adjust to ongoing real changes in supply and demand yields unemployed resources
b) Inflation (in any amount?) adds difficulty to judging future relative prices.
c) Thus, the central bank must dynamically optimize the inflation rate. d)
d) FAIT is the real-life approximate instantiation of dynamic optimization.
Summers warned against the wrong danger, of seeking to claim unjustified credit for the Fed-generated recovery with the risk of getting unfairly blamed for the Fed-generated inflation.
Larry is right?
a) _Now_ he realizes that expectations 4 years ago were anchored (that people believed that the Fed did not intend inflation to go above target in the long run? [TIPS was about 200 basis points _below_ target. in early 2020 and only on target in 2021]
b) Does he mean that Trump chaos could produce sticky relative prices leading to unmonetizable stagflation? Or a series of relative price shocks that would force the Fed to inflate constantly long enough to congeal some relative prices into a stagnation configuration?
Baker’s chart is telling about ballot preference affects voters’ information sources. 😊 And aren’t good citizens _supposed_ to vote in the general interest, not their own?
Conclusion:
“I Think Jay Powell, His Committee, & His Staff All Deserve Enthusiastic High-4.9’s”
ARP did not provide any “insurance” that the Fed could not and indeed was already providing
For “adaptive expectations” read “sticky _relative) prices” throughout and with that, full agreement.
There is an overlooked third horn :) of the dilemma: was there a time before March 2022 when a turn to disinflation could have avoided both the politically destabilizing inflation/severity of the eventually run-up of the EFFR without significantly hitting employment? Was TIPS crossing from expecting undershooting to overshooting in September 2021 that time?
And if there was a delay in switching to disinflation, is it not explained in part by the Fed self constrain that policy instrument movements must be both telegraphed (if not announced as "guidance" AND that movement must be monotonic?
Isn't it secularly irresponsible of the Fed to pose as only "fighting" inflation, "a roaring lion, [who] walks about, seeking whom he may devour." Should it not have clearly stated in 2020 that Fed policy was to increase inflation to promote recovery until it was not?
For something as complex as an economy, and worse its interactions with other economies, plus the vagaries of weather, etc., the limitations of human cognition result in specialists focusing and understanding a subset of data, with models front and center that can be useful. Every POV varies on the subset to be used to understand what happened and what may happen in the future. If ever there was a need for more powerful computer modeling with AI to handle the complexity and overcome human limitations, this discipline may benefit from it.
Fabulous Lecture! I hope you were paid many TIPS! :)
Comments on the slides:
Does the end of secular stagnation (if it exists) have to be “foreseen”
What needed to be “foreseen” after the Putin invasion?
Types of excess demand/supply of money: Why isn’t FAIT the prescription for all four?
Isn’t “stagflation,” misaligned sticky _relative_ prices a fifth kind that for which there is indeed no monetary solution but which hypothetically could be solved by fiscal policy that alters real sectoral supplied and demand to make the sticky relative price optimal?
Is there any doubt that Bewley, suitably extended beyond the implicit 1-1-1 economy -- 1 output (“GDP”), 1 input (undifferentiated labor) and 1 relative price (the real wage) – to acknowledge other misaligned relative prices because of asymmetrically sticky prices in multiple sectors, provided the theoretical justification for Krugman?
Why did Bernanke think the Fed could not create sufficient inflation to restore full employment w/o expansionary fiscal policy?
When r < g what does a national debt do that a central bank determined to inflate cannot?
Are there any examples of capitalism having been overturned by the Lenin/Keynes 😊 policy. I think the discontent with inflation is more likely that, “My nominal income is mine and [someone]’s inflation is robbing me of part of it,”
The “Blowback” slide assumes a 1-1-1 economy. Such an economy does not need money or monetary policy. The undodgeable question only arises with multiple sectors and multiple relative prices whose failure to adjust could cause markets not to clear/unemployed resources.
Keynes’’s measuring rod argument translated:
a) Inflation insuffinet to permit the relative prices of sticky nominal prices to adjust to ongoing real changes in supply and demand yields unemployed resources
b) Inflation (in any amount?) adds difficulty to judging future relative prices.
c) Thus, the central bank must dynamically optimize the inflation rate. d)
d) FAIT is the real-life approximate instantiation of dynamic optimization.
Summers warned against the wrong danger, of seeking to claim unjustified credit for the Fed-generated recovery with the risk of getting unfairly blamed for the Fed-generated inflation.
Larry is right?
a) _Now_ he realizes that expectations 4 years ago were anchored (that people believed that the Fed did not intend inflation to go above target in the long run? [TIPS was about 200 basis points _below_ target. in early 2020 and only on target in 2021]
b) Does he mean that Trump chaos could produce sticky relative prices leading to unmonetizable stagflation? Or a series of relative price shocks that would force the Fed to inflate constantly long enough to congeal some relative prices into a stagnation configuration?
On Furman, see:
https://thomaslhutcheson.substack.com/p/anti-neoliberal-tiff
Baker’s chart is telling about ballot preference affects voters’ information sources. 😊 And aren’t good citizens _supposed_ to vote in the general interest, not their own?
Conclusion:
“I Think Jay Powell, His Committee, & His Staff All Deserve Enthusiastic High-4.9’s”
ARP did not provide any “insurance” that the Fed could not and indeed was already providing
For “adaptive expectations” read “sticky _relative) prices” throughout and with that, full agreement.
There is an overlooked third horn :) of the dilemma: was there a time before March 2022 when a turn to disinflation could have avoided both the politically destabilizing inflation/severity of the eventually run-up of the EFFR without significantly hitting employment? Was TIPS crossing from expecting undershooting to overshooting in September 2021 that time?
And if there was a delay in switching to disinflation, is it not explained in part by the Fed self constrain that policy instrument movements must be both telegraphed (if not announced as "guidance" AND that movement must be monotonic?
Isn't it secularly irresponsible of the Fed to pose as only "fighting" inflation, "a roaring lion, [who] walks about, seeking whom he may devour." Should it not have clearly stated in 2020 that Fed policy was to increase inflation to promote recovery until it was not?
For something as complex as an economy, and worse its interactions with other economies, plus the vagaries of weather, etc., the limitations of human cognition result in specialists focusing and understanding a subset of data, with models front and center that can be useful. Every POV varies on the subset to be used to understand what happened and what may happen in the future. If ever there was a need for more powerful computer modeling with AI to handle the complexity and overcome human limitations, this discipline may benefit from it.