Sandbu: We are supposed to HAVE a Leijunhufvud based theory of the natural of inflation (the rate that maximizes real income subject to expected shocks requiring changes in relative prices when some prices cannot adjust downward). The Fed supposedly estimated it at 2% PCE, but recognized that extraordinarily large shocks -- COVID/Putin…
Sandbu: We are supposed to HAVE a Leijunhufvud based theory of the natural of inflation (the rate that maximizes real income subject to expected shocks requiring changes in relative prices when some prices cannot adjust downward). The Fed supposedly estimated it at 2% PCE, but recognized that extraordinarily large shocks -- COVID/Putin -- require a FAIT. Now it just needs to figure out ho to set policy instrument values at levels to achieve its target.
Sandbu: We are supposed to HAVE a Leijunhufvud based theory of the natural of inflation (the rate that maximizes real income subject to expected shocks requiring changes in relative prices when some prices cannot adjust downward). The Fed supposedly estimated it at 2% PCE, but recognized that extraordinarily large shocks -- COVID/Putin -- require a FAIT. Now it just needs to figure out ho to set policy instrument values at levels to achieve its target.
But it didn’t have a theory. Alan Greenspan announced that 2%/year had been written on a stone tablet.
Do we t know for sure it it needs editing? Would the case for a pause be an stronger if the target were 3%?
Yes...
I'll adjust my priors. :)
But I still feel that a 2% FAIT has hardly been tried.
When and how does the Fed explain the change?