A thread on Fed policy, explaining — partly to myself — where I'm coming from. The first thing to say is that in a *qualitative* sense my views are depressingly mainstream. My working model is that inflation, other things equal, reflects unemployment and expected inflation 1/
This model could be wrong! Hoping that @Claudia_Sahm will explain why she wants to ban the Phillips curve (and how to replace it) when we have a CUNY event on the 19th 2/
But if you accept that model, there is at any given time an unemployment rate — u* — at which actual inflation will more or less match expected inflation. (Don't like calling it a NAIRU — with anchored expectations, which we seem to have, u<u* doesn't cause accelerating inf) 3/
This leaves three questions:
1. What is u*?
2. Do we need to go above it?
3. What Fed policy is needed to get where we need to go? 4/
Pre pandemic, u* seemed to be around 3.5, which is where we are now. However, high vacancies and high core inflation seemed to suggest a big rise. However however, vacancies coming down rapidly and wage growth not that high. 5/
Does u need to go well above u*, Volcker style? Some people still saying that, still talking about "sacrifice ratios", but I don't get it. The Volcker slump was an effort to squeeze out high inflation expectations. But expected inflation isn't high now 6/
Longer perspective, to show how different things are this time 7/
So I just don't see the case for a period of "excess" unemployment. That still leaves the question of how much more, if any, Fed tightening is required to cool the economy to a sustainable temperature 8/
Personal background may matter here. My macro roots are in international, where we've always known that there are long lags in the effect of exchange rates on trade flows, leading to phenomena like the J-curve 9/
And the strong dollar will in fact exert a major contractionary effect on the US, but not for a number of months yet. The other major channel is through housing. And surely there are significant lags there too 10/
I mean, do you really think we've seen anything like the full effects of the financial tightening that has already happened? 11/
Also good reason to believe that measured inflation will lag well behind economic cooling, if only because of issues involving shelter. 12/
So even given a very mainstream view of how this stuff works, I see a strong case that the Fed has already done enough even if the most recent job numbers were strongish and inflation not yet down. 13/
You want to shoot ahead of a moving target, not behind it 14/
このモデルが間違っている可能性もある! 19日にニューヨーク市立大学で開催するイベントでクラウディア・サームが、彼女がフィリップス曲線を禁止したい理由(とそれをどのように置き換えるか)を説明することを期待しよう。

  1. u*は何か?
  2. 失業率はそれより高くなるべきなのか?
  3. 必要とされる状態に行くためにどのようなFRBの政策が必要とされているのか?

uはボルカー流にu*よりもかなり上に行かなくてはならないのか? 未だにそう言っている人がいて、未だに「犠牲率」について云々しているが、私には理解できない。ボルカー不況は高いインフレ予想を追い出そうとするものだった。だが今のインフレ予想は高くない。