I think the discussion of what’s happening to AD needs a closer look than just “what’s the current stance of fiscal and monetary policy? Loose? AD must be rising then”. A key component of AD is private sector borrowing from banks.
Sometimes (2008) you have an impaired banking system that won’t lend, and households/businesses (frightened by recession and with weak balance sheets) that won’t borrow… you can cut interest rates to zero and do a bucket load of QE, net bank lending will remain negative and the impact of these monetary policy moves on AD will be limited. That leaves fiscal policy / government spending as the only game in town. The 2008 fiscal stimulus was insufficient and the economy stagnated.
In other circumstances (2021?), household balance sheets are strong and corporate profitability is high because of muscular gov bailouts early on. Loose monetary policy spurs demand for housing and mortgage lending accelerates - this results in a more rapid increase in the money supply and then rising spending across the economy. Eventually we hit supply constraints, and inflation rises.
I'd offer that the standard macroeconomic models, in my understanding, are classic continuum differential equation models in time. But "expectations" are really due to time-offset factors, and as Noah knows delay differential equations are typically difficult to solve, and more so as the time difference gets longer. In other words the math being used here is not correct for the problem of inflation high enough to invalidate non-delayed models. In other words if you invoke "expectations" you can't use single time-continuous models.
You didn't mention the biggest supply shock which is the supply of plague free local services. Only a very poor substitute is available, one where we are forced to risk people's health when consuming.
> "At what point do these price increases stop simply being a drag on wages"
You should distinguish supply side inflation which are a "drag on wages" from demand side inflation caused from central banks which are prices rising _because_ aggregate income is rising.
Yeah even with demand side, wages might be rising unequally, the poorest people first which means suddenly the middle class has to compete with the poor for goods. Since the middle class has more stable jobs that they don't negotiate as often as the poor, there might be a lag on the upward effect on their wages but overall central bank easing, all else equal, is upward push on real wages, especially of the poorest, until "menu costs" start hitting (all else not being equal makes this confusing).
I shudder to think what would have happened if the covid shock had been paired with under-stimulative central banks like in the aftermath of the 2008 crisis. The disaster would have made the 2010s look like the good years since the initial shock was much bigger. I acknowledge that central banks now seem to be overdoing it, however.
The risk of actually getting into hyper-inflation is why I've always felt that the "mint the coin" move, as retaliation against GOP debt-ceiling shenanigans, should be kept on the table, but understood as incredibly dangerous, and _always_ paired with, "We'd be happy to pass a law that abolishes both infinite seignorage and the debt ceiling."
Interesting read - i liked the juxtaposition of US and EZ inflation. Greater demand boost in US seems like a plausible explanation. One small correction: Laurence Boone is a woman.
Being in the middle of Steve Keen’s book, “The New Economics: a Manifesto” I knew that he had anticipated the Great Recession and that he is a “non-orthodox” economist. Noah writes that basic macroeconomics is Keynesian macroeconomics, but there is a lot of Neoclassical economics in this post. Some examples: there is praise for Bernanke and QE, liberal use of supply/demand curves, and reference to the natural rate of unemployment which MMT criticizes because, for one reason, it leaves out the goal of full employment.
It would have been instructive to include views on inflation from Keen’s new economics and MMT.
Demand shift from services to goods is playing a big role. See Mattthew Klein on “The Overshoot”. Different packaging and distribution channels also even for the same products if consumed at home or at an office/restaurant
Did macroeconomics fail us on inflation?
Occam’s Razor would suggest that handing out checks to people is a pretty good way to create inflation
I think the discussion of what’s happening to AD needs a closer look than just “what’s the current stance of fiscal and monetary policy? Loose? AD must be rising then”. A key component of AD is private sector borrowing from banks.
Sometimes (2008) you have an impaired banking system that won’t lend, and households/businesses (frightened by recession and with weak balance sheets) that won’t borrow… you can cut interest rates to zero and do a bucket load of QE, net bank lending will remain negative and the impact of these monetary policy moves on AD will be limited. That leaves fiscal policy / government spending as the only game in town. The 2008 fiscal stimulus was insufficient and the economy stagnated.
In other circumstances (2021?), household balance sheets are strong and corporate profitability is high because of muscular gov bailouts early on. Loose monetary policy spurs demand for housing and mortgage lending accelerates - this results in a more rapid increase in the money supply and then rising spending across the economy. Eventually we hit supply constraints, and inflation rises.
I'd offer that the standard macroeconomic models, in my understanding, are classic continuum differential equation models in time. But "expectations" are really due to time-offset factors, and as Noah knows delay differential equations are typically difficult to solve, and more so as the time difference gets longer. In other words the math being used here is not correct for the problem of inflation high enough to invalidate non-delayed models. In other words if you invoke "expectations" you can't use single time-continuous models.
You didn't mention the biggest supply shock which is the supply of plague free local services. Only a very poor substitute is available, one where we are forced to risk people's health when consuming.
> "At what point do these price increases stop simply being a drag on wages"
You should distinguish supply side inflation which are a "drag on wages" from demand side inflation caused from central banks which are prices rising _because_ aggregate income is rising.
Yeah even with demand side, wages might be rising unequally, the poorest people first which means suddenly the middle class has to compete with the poor for goods. Since the middle class has more stable jobs that they don't negotiate as often as the poor, there might be a lag on the upward effect on their wages but overall central bank easing, all else equal, is upward push on real wages, especially of the poorest, until "menu costs" start hitting (all else not being equal makes this confusing).
I shudder to think what would have happened if the covid shock had been paired with under-stimulative central banks like in the aftermath of the 2008 crisis. The disaster would have made the 2010s look like the good years since the initial shock was much bigger. I acknowledge that central banks now seem to be overdoing it, however.
The risk of actually getting into hyper-inflation is why I've always felt that the "mint the coin" move, as retaliation against GOP debt-ceiling shenanigans, should be kept on the table, but understood as incredibly dangerous, and _always_ paired with, "We'd be happy to pass a law that abolishes both infinite seignorage and the debt ceiling."
Interesting read - i liked the juxtaposition of US and EZ inflation. Greater demand boost in US seems like a plausible explanation. One small correction: Laurence Boone is a woman.
Is Japan still considered kind of a mess by macro-economists?
If so what would be the best next step?
Do you think Biden should have nominated Nakamura to the Fed? I would love to see a post where you compare her to other nominees.
Being in the middle of Steve Keen’s book, “The New Economics: a Manifesto” I knew that he had anticipated the Great Recession and that he is a “non-orthodox” economist. Noah writes that basic macroeconomics is Keynesian macroeconomics, but there is a lot of Neoclassical economics in this post. Some examples: there is praise for Bernanke and QE, liberal use of supply/demand curves, and reference to the natural rate of unemployment which MMT criticizes because, for one reason, it leaves out the goal of full employment.
It would have been instructive to include views on inflation from Keen’s new economics and MMT.
Time for some policy experiments!
Universal Basic Income, but with the values of monthly checks inversely tired to inflation
Demand shift from services to goods is playing a big role. See Mattthew Klein on “The Overshoot”. Different packaging and distribution channels also even for the same products if consumed at home or at an office/restaurant
OK this is totally unrelated to this post, but what language/script is that, below the "Stop! Go home!"