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Monday, October 23, 2017

In Defense of the Conventional Wisdom

Tim Duy:

In Defense of the Conventional Wisdom: Let’s revisit this from San Francisco Federal Reserve Resident John Williams:
If you look until 2015 or so, the inflation data basically followed our models, emphasizing the role of weakness in the economy. Where this mystery has happened is really in the last year or two. I view both inflation picking up faster than expected in early 2017 and now the pullback as just part of the variability that’s going to happen. I don’t see any signs that somehow the inflation process is fundamentally changed.
I’ve been doing this a long time, and the Phillips curve has been declared dead far more times than Mark Twain.
This is representative of the conventional wisdom at the Fed, summed up succinctly as adherence to a basic expectations-augmented Phillips curve as a primary policy guide. As unemployment falls toward and below full employment, capacity constraints in the economy tighten and eventually create inflationary pressures. The central bank needs to offset these pressures via tighter policy to contain inflation and maintain inflation expectations, the center of gravity for actual inflation over time. ...Continued here...

    Posted by on Monday, October 23, 2017 at 09:39 AM in Economics, Monetary Policy | Permalink  Comments (77)


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