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Sunday, July 06, 2014

'Slump Stories and the Inflation Test'

Does evidence matter?:

Slump Stories and the Inflation Test: Noah Smith has another post on John Cochrane’s anti-Keynesian screed... All the anti-Keynesian stories (except “uncertainty”, which as Nick Rowe points out is actually a Keynesian story but doesn’t know it) are supply-side stories; Cochrane even puts scare quotes around the word “demand”. Basically, they’re claiming that unemployment benefits, or Obamacare, or regulations, or something, are reducing the willingness of workers and firms to produce stuff.
How would you test this? In a supply-constrained economy, the kind of monetary policy we’ve had, with the Fed quintupling the size of its balance sheet over a short period of time, would be highly inflationary. Indeed, just about everyone on the right has been predicting runaway inflation year after year.
Meanwhile, if you had a demand-side view, and considered the implications of the zero lower bound, you declared that nothing of the sort would happen...
It seems to me that the failure of the inflation predicted by anti-Keynesians to appear — and the fact that this failure was predicted by Keynesian models — is a further big reason not to take what these people are saying seriously.

In a "supply-constrained economy" the price of inputs like labor should also rise, but that hasn't happened either.

    Posted by on Sunday, July 6, 2014 at 09:52 AM in Economics, Macroeconomics | Permalink  Comments (24)



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