We really don’t have a strong grasp on why prices go up and down
We were surprised when inflation rose. We were surprised when inflation fell. And we were surprised again when inflation stopped falling. The message of all these surprises is that we — including professional economists — really don’t have a strong grasp on why prices go up and down.
Aside from those practical considerations: If we don’t understand inflation, then we also don’t truly understand anything else about the business cycle (if there even is one), because growth and inflation are intertwined.
Jerome Powell likes to say that the Fed rate-setters are navigating by the stars under cloudy skies.
Jeremy Rudd “A Practical Guide to Macroeconomics,”
It’s common sense that inflation tends to go up when the economy is running hot because of the laws of supply and demand
Rudd writes that the Phillips curve hasn’t been emitting useful signals. “Although the Phillips curve has been an object of fascination since it was first introduced, we have no compelling theory of inflation dynamics that would allow us to understand the Phillips correlation — or the historical shifts in the Phillips curve — on anything like a deep level,” he writes.
The fact that “we simply don’t know what caused the U.S. economy to transition into an inflation regime” like the one of 2021 and 2022 “is embarrassing from a professional standpoint,” Rudd writes, “because it highlights that we still understand close to nothing about how inflation works despite seven decades’ worth of research.”
One problem with academic theories of inflation, though, is that they tend to depend on the estimation of numbers that can’t be directly observed, such as how fast the economy can grow without generating inflation
Rudd asks: “So how did academic macroeconomics become utterly incapable of giving sensible answers to important questions?”
Peter Coy New York Times 12 April 2024
What’s the difference between $100 in cash and $100 in a checking account?
Peter Coy 19 July 2023
https://englundmacro.blogspot.com/2023/07/whats-difference-between-100-in-cash.html
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