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Brad DeLong's Grasping Reality 2019-12-06 18:14:36

Summary:
Robert Barro appears unhappy that the economy possesses multiple expectational equilibria, and seeks for a model of inflation that does have this property. This is, frankly, a weird thing to do: models are supposed to represent the salient features of the world, not ignore them. And that economies often have multiple expectational equilibria and sometimes shift rapidly from one to another has been a live position now for... nearly two centuries, since John Stuart Mill and Jean-Baptiste Say analyzed the British financial crisis of 1825. And it was made hegemonic by... John Maynard Keynes more than 80 years ago in his General Theory. But unhappiness with a theory is not a reason to reject it: Robert J. Barro: Mysteries of Monetary Policy: "The puzzle is how the Fed can keep inflation

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Robert Barro appears unhappy that the economy possesses multiple expectational equilibria, and seeks for a model of inflation that does have this property. This is, frankly, a weird thing to do: models are supposed to represent the salient features of the world, not ignore them. And that economies often have multiple expectational equilibria and sometimes shift rapidly from one to another has been a live position now for... nearly two centuries, since John Stuart Mill and Jean-Baptiste Say analyzed the British financial crisis of 1825. And it was made hegemonic by... John Maynard Keynes more than 80 years ago in his General Theory. But unhappiness with a theory is not a reason to reject it: Robert J. Barro: Mysteries of Monetary Policy: "The puzzle is how the Fed can keep inflation steady at 1.5‑2% per year by relying on a policy tool that seems to have only weak and delayed effects.... [Perhaps] the credible threat of extreme responses from the Fed has meant that it does not actually have to repeat the Volcker-era policy.... Frankly, I am unhappy with this explanation. It is like saying that the inflation rate is subdued because it just is.... This suggests that the monetary policy behind today’s low and stable actual and expected inflation will keep working until, suddenly, it doesn’t. This makes me wish that I had a better understanding of monetary policy and inflation. It also makes me wish that the people responsible for monetary policy had a better understanding than I have. Many readers, no doubt, would say that my second wish has already been granted....

Bradford DeLong
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

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