Inflation expectations are at least in part a reflection of both fiscal and monetary policies. Fiscal policies are grim. Is our new Fed chairman likely to follow a rules based policy and therefore more reliable as an anchor on inflation expectations?
Can "expectations" capture everything necessary for the Fed to respond to a secoral shock that requires substantial movement of relative prices some of which are downwardly sticky? How far can we get with a one good one input one relative price model?
Good question. If you think the role of the Fed is to micromanage the economy, no. One lever, one result. If the Fed's job is just a stable price level, period, it has more chance of achieving it.
This is probably a silly question, but is there anything special about a 2% inflation rate? Why not 2.5% or 1.5%? Just asking. Thank you for attempting to educate this old hermit.
It was picked out of thin air by the Reserve Bank of New Zealand in the early 1990s and stuck. I like 0, or better a price level target. Some like 2% inflation because then interest rates will be 3-4% in normal times and that gives the Fed more room to lower rates to zero later. I think that's like wearing shoes too small during the day because it feels good when you take them off
Would you be willing to put up with a period of deflation to achieve your preferred target of 0% inflation (or a price level target)? Would Congress? Would the then-current administration?
Sorry if this is a naïve question, but I don't see money supply appearing anywhere in these models. I take π to represent the rise in the general price level. Are we implicitly holding the money supply constant here?
If so, what is the mechanism by which the general price level continues to rise? Is the argument that changes in velocity, inflation expectations, labor-market tightness, or aggregate demand are sufficient to generate sustained inflation even with a constant money stock?
Put differently, where does money enter the model? If inflation is ultimately a monetary phenomenon, I'm struggling to see how a persistent increase in the general price level emerges without either an increase in the money supply or an increase in money's effective circulation.
Inflation expectations are at least in part a reflection of both fiscal and monetary policies. Fiscal policies are grim. Is our new Fed chairman likely to follow a rules based policy and therefore more reliable as an anchor on inflation expectations?
I doubt it. I see more of a "whatever it takes" commitment to results rather than adherence to one particular rule about how to get there.
Can "expectations" capture everything necessary for the Fed to respond to a secoral shock that requires substantial movement of relative prices some of which are downwardly sticky? How far can we get with a one good one input one relative price model?
Good question. If you think the role of the Fed is to micromanage the economy, no. One lever, one result. If the Fed's job is just a stable price level, period, it has more chance of achieving it.
Not micro-mange but macro-manage. :) Congress gave the Fed two jobs, not one. And even if one, “stable” at what rate of increase?
This is probably a silly question, but is there anything special about a 2% inflation rate? Why not 2.5% or 1.5%? Just asking. Thank you for attempting to educate this old hermit.
It was picked out of thin air by the Reserve Bank of New Zealand in the early 1990s and stuck. I like 0, or better a price level target. Some like 2% inflation because then interest rates will be 3-4% in normal times and that gives the Fed more room to lower rates to zero later. I think that's like wearing shoes too small during the day because it feels good when you take them off
Would you be willing to put up with a period of deflation to achieve your preferred target of 0% inflation (or a price level target)? Would Congress? Would the then-current administration?
Thank you for the explanation.
Sorry if this is a naïve question, but I don't see money supply appearing anywhere in these models. I take π to represent the rise in the general price level. Are we implicitly holding the money supply constant here?
If so, what is the mechanism by which the general price level continues to rise? Is the argument that changes in velocity, inflation expectations, labor-market tightness, or aggregate demand are sufficient to generate sustained inflation even with a constant money stock?
Put differently, where does money enter the model? If inflation is ultimately a monetary phenomenon, I'm struggling to see how a persistent increase in the general price level emerges without either an increase in the money supply or an increase in money's effective circulation.