A few questions for people who don't believe in the Phillips curve or wage-price links:
1. Do interest rate increases lower inflation? If so, what is the mechanism?
2. If the economy goes into recession would that be more likely to raise or lower or keep inflation unchanged?
1. Do interest rate increases lower inflation? If so, what is the mechanism?
2. If the economy goes into recession would that be more likely to raise or lower or keep inflation unchanged?
3. If the unemployment rate was 2% or the quits rate was 5% or the openings rate was 20% would you predict more, less or the same nominal wage growth? How about price growth?
4. Would your answers change at unemployment of 10%, quits of 1% or openings of 4%?
4. Would your answers change at unemployment of 10%, quits of 1% or openings of 4%?
5. If compensation growth was 5.5% over the next five years what would you predict the inflation rate would be over the next five years?
6. All else equal to the scenario in 5 except compensation growth was 3.5% over the next five years what would you predict for price growth?
6. All else equal to the scenario in 5 except compensation growth was 3.5% over the next five years what would you predict for price growth?
None of the above is normative.
You might agree rate hikes cause recessions and thus reduce inflation but think that would be bad or cause inflation to undershoot.
You might think real wage growth higher with nominal comp growing 5.5% vs. 3.5% due to partial inflation offset.
You might agree rate hikes cause recessions and thus reduce inflation but think that would be bad or cause inflation to undershoot.
You might think real wage growth higher with nominal comp growing 5.5% vs. 3.5% due to partial inflation offset.
But I'm not sure I understand if anyone is actually arguing that, everything else equal, inflation is unrelated to demand/labor market conditions/economic activity/wage growth.
And if you're not arguing that, then what exactly are you arguing?
And if you're not arguing that, then what exactly are you arguing?
Maybe the argument is that it is true that inflation is, all else equal, a function of demand/labor market conditions/economic slack.
But that this relationship is so unstable and unknowable that it is not a good basis for policy.
But that this relationship is so unstable and unknowable that it is not a good basis for policy.
But, that begs a question of how you would guide policy.
Pre-COVID many said (and I sympathized) they didn't believe in the Phillips curve as an argument for preemptive rate hikes to stop inflation that hadn't appeared yet.
But inflation is here now.
Pre-COVID many said (and I sympathized) they didn't believe in the Phillips curve as an argument for preemptive rate hikes to stop inflation that hadn't appeared yet.
But inflation is here now.
If you don't believe in the Phillips curve at all then you might want to be *more* aggressive in your policy, needing to see actual inflation come down because you would distrust any forecasts based on models predicting it will come down.
The strongest case for restraint in tightening, in my view, uses the conventional model to argue that because labor markets are getting less tight (i.e., openings down) and wage growth appears to be slowing, that inflation is likely to slow in the future.
(To be clear, I would debate Paul's conclusion. Not because I have a different model but because I have different parameters in that model and also am, in fact, more skeptical of the model so want to see more actual inflation reduction.)
I understand the conventional models that the Fed, @paulkrugman, & I use for these issues.
I understand the model-less way of proceeding which would just use actual unemployment and inflation and lead to more hawkish conclusions.
I don't understand the coherent alternatives.
I understand the model-less way of proceeding which would just use actual unemployment and inflation and lead to more hawkish conclusions.
I don't understand the coherent alternatives.
P.S. By "model" I don't necessarily mean one consistent set of equations, although that is a helpful discipline. I'm skeptical of people who over believe one model. I would use a few different models, some rules of thumb, some commonsense, some different perspectives, etc.
I agree with @tdgraff. In 2021 the nominal spending/real growth framework was useful. Over longer periods/larger changes the quantity theory more useful (e.g., Argentina's much higher inflation isn't because it has much less slack).
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