Must-Read Pre-Liftoff Lollapalooza: Jared Bernstein: Will Inflation Really Snap Back Once “Temporary Factors” Abate?

Must-Read Pre-Liftoff Lollapalooza: Even if there were no model uncertainty, the asymmetry of the situation would lead a rational optimizing policymaker to keep interest rates at zero until the need for liftoff was undeniable. With model uncertainty, a rational optimizing policymaker would keep interest rates at zero for considerably longer…

Jared Bernstein: Will Inflation Really Snap Back Once “Temporary Factors” Abate?: “I noted the Fed’s theory of the case as to why inflation isn’t accelerating…

…temporary factors, including low, low oil prices and the strong dollar, are blocking the usual signal…. [But] it’s not just that inflation isn’t picking up as output gaps close and unemployment falls. Inflation didn’t fall as much as expected when such activity gaps were much wider…. Blanchard, Cerutti, and Summers… a flat slope of the Phillips curve… ain’t exactly a new development…. The slope of the PC has been low for a decade… about 0.2, well below it’s historical levels in the 70s and 80s…. Larry Ball, in commenting on BCS, runs particularly transparent models and finds more stable, significant PC coefficients (though they are of the same magnitude as BCS)…. However, [he] do[es] not give much support to the view that the flat PC is temporarily low as a function of a few unique factors…. Inflation hawks, pull in your talons!

December 15, 2015


Brad DeLong
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