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What does it mean to say that something is inflationary? (part 2)

Summary:
Let’s try again. Here’s how I would answer the question: Is X inflationary?1. Under successful inflation targeting, X is not inflationary.2. Under successful NGDP targeting, X is inflationary if it reduces RGDP.3. Under money supply targeting, X is inflationary if it reduces real money demand (perhaps due to higher V or lower Y)4. Under interest rate targeting, X is inflationary if it raises the natural rate of interest.5. Under a fixed exchange rate regime, X is inflationary if it raises the equilibrium real exchange rate.6. Under the gold standard, X is inflationary if it raises the supply of gold or reduces the demand for gold.7. Under a successful Taylor Rule, X is inflationary if it creates a negative output gap.In these examples, X might be fiscal stimulus. It

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Let’s try again. Here’s how I would answer the question: Is X inflationary?

1. Under successful inflation targeting, X is not inflationary.
2. Under successful NGDP targeting, X is inflationary if it reduces RGDP.
3. Under money supply targeting, X is inflationary if it reduces real money demand (perhaps due to higher V or lower Y)
4. Under interest rate targeting, X is inflationary if it raises the natural rate of interest.
5. Under a fixed exchange rate regime, X is inflationary if it raises the equilibrium real exchange rate.
6. Under the gold standard, X is inflationary if it raises the supply of gold or reduces the demand for gold.
7. Under a successful Taylor Rule, X is inflationary if it creates a negative output gap.

In these examples, X might be fiscal stimulus. It might be an increase in the minimum wage. It might be supply chain problems. it might be an oil shock. It might be an increase in monopoly power. It could be anything. And my answer is always the same. The answer depends on the monetary regime.

The seven answers above apply to any shock, of any type. If there’s war in the Ukraine, the list above gives you your answer. If the woke people take over America, the list above gives you your answer. If vaccines wipe out most of our population in three years (as some Republicans expect), the list above tells you the effect on inflation.

The answer always depends on the monetary regime.

This is frustrating to many people. We want a simple answer. We want to know the impact of X holding monetary policy constant. But I’ve just shown you seven different ways of holding monetary policy constant. Which one did you have in mind?


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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