Krugman and Avent on the inflation puzzle

Paul Krugman recently discussed the surprisingly small decline in the rate of inflation, despite a large and persistent output gap.  He argued that this was partly due to the fact that nominal wage cuts are difficult, and hence aggregate wages keep rising (slowly) despite high unemployment. I think that’s basically right, although of course I prefer to focus on NGDP growth rather than output gaps.

Now Ryan Avent has a post that challenges Krugman’s view:

But given a large enough output gap we would nonetheless expect disinflation to eventually turn to deflation. In 2009, short-run inflation expectations briefly turned negative. Prices are now falling across much of the euro zone. And deflation has obviously been a chronic problem in Japan. The answer to the question of why deflation in, say, America hasn’t been sustained despite little progress closing the output gap is extremely simple: the Fed has been determined not to allow that to happen.

Here I think Ryan is missing the point that Krugman was trying to address.  To see why, return to my recent plea for people to use the language of AS/AD.  Avent is saying that the Fed prevented AD from falling so sharply that we had deflation.  Krugman is noting that the Fed (and or other factors) let AD fall enough to create high unemployment, and asking why more of the decline didn’t show up in the form of falling prices.

Ideally I’d like to see people use the terms “AD” and “NGDP” synonymously.  Thus Avent is pointing out that the Fed provided enough NGDP to keep inflation close to 2%, and Krugman is trying to address they question of why it is that despite the fact that (since 2008) NGDP has grown at the slowest rate since Herbert Hoover was president, a surprisingly large share of the slow NGDP growth has shown up as low RGDP growth, and a surprisingly small share has shown up as disinflation.  So Avent isn’t really addressing the same puzzle as Krugman.

I do agree with Ryan on this point:

Two further thoughts flow from this analysis. One is that the Fed bulwark against deflation means that many of the up-is-down aspects of liquidity traps, like the “paradox of toil“, don’t apply; increases in economic potential due to supply-side measures don’t lead to more deflation and therefore don’t worsen the downturn. And the other is that the Fed’s observed success in averting deflation should lead one to ask whether its control over inflation expectations suddenly evaporates once those expectations hit 2%. My view is that it does not””why should it, after all?””and that the main constraint on a faster economic recovery is the Fed’s reluctance to push inflation over 2%. I suspect Mr Krugman disagrees, but this seems to me to be the most straightforward conclusion to draw from the experience since 2008.

But I have doubts about this one:

Let me pre-emptively note that I am not assuming a small or zero multiplier on fiscal policy. Depending on the Fed’s reaction function, fiscal stimulus can and probably has augmented recovery, while fiscal austerity may not be and probably has not been entirely offset by expansionary monetary policy.

Certainly it’s possible that Avent is right, especially if you take “entirely offset” literally.  But that’s a pretty low bar for a policy that is far more costly than monetary stimulus.  More likely, the moves made by the Fed last fall were in anticipation of the fiscal tightening we are seeing this year—beginning with numerous tax increases, and now some spending cuts—and I’d guess they roughly offset the impact.

I’d add that it’s difficult to reconcile Avent’s views on the paradox of toil and fiscal austerity.  If the Fed keeps labor supply increases from depressing inflation, why wouldn’t it keep fiscal austerity from depressing inflation?

PS.  Nick Rowe has an interesting post.  He discusses the odd case of Canada, which did not experience disinflation during the recession.  I can’t imagine why, unless they were hit by an adverse supply shock at about the same time.  In any case, it should be noted that America did experience disinflation in 2009 and 2010.



40 Responses to “Krugman and Avent on the inflation puzzle”

  1. Gravatar of Frederic Mari Frederic Mari
    7. March 2013 at 06:49

    I think this is a really interesting question. We all tend to agree that nominal wages are somewhat ‘sticky’ but, in reality, when people are getting laid off, their ‘reservation price’ (referencing here a post and discussion on the topic on Tyler Cowen’s blog) does fall.

    There’s been plenty of anecdotes about people losing their jobs and being forced to take new ones at a lower pay.

    Is it really just a matter of ‘the plural of anecdotes isn’t data’ or is something not being fully captured into our numbers?

  2. Gravatar of William Luther William Luther
    7. March 2013 at 07:00

    If anything, I’d expect Canada has experienced favorable supply shocks…

  3. Gravatar of John Papola John Papola
    7. March 2013 at 07:07


    The language of AS/AD may work well among economists who have a careful understanding of the distinction between monetary effects and real effects, but I believe strongly that it is difficult, even destructive, for non-economist readers precisely because nominal vs. real distinction becomes entangled. This is made worse by the fact that Keynesians explicitly discuss “demand” in terms of targeting real variables.

    In the aggregate, there isn’t actually two separate things called “aggregate demand” and “aggregate supply”. There is no “aggregate demander” bidding for the goods and services provided by an “aggregate supplier” and arriving at a “price level”.

    There is only the total dollar volume of exchange. It’s a dot, not two curves. It’s always just a dot.

    In the aggregate, demand cannot occur without being constituted by supply, save for the loose joint of money.

    You said recently that macro students should only be taught two concepts: Say’s Law, and NGDPLT. I generally agree (even if I have concerns about NGDP being a sufficiently broad proxy for the flow of nominal spending). AS/AD doesn’t aid this understanding without it being HEAVILY caveated.

    When the public hears about “demand”, they think about “consumers” buying stuff. They think about wrong-headed ideas like the often-repeated notion that consumers “drive” economic growth, rather than production and investment. They think about the Keynesian approach, which is all they hear. And the Keynesian approach rolls in with it the conflation between saving and hoarding that has plagued macro since Malthus.

    So here’s my challenge.

    Let’s start with the assumption that policy is driven by what politicians believe to be popular opinion. When that opinion was believed to be “the old time fiscal religion”, even FDR was quick to try and balance the budget. Today, Keynesianism and its “spending” fixation dominate.

    Can we find a way to talk about these monetary issues that illuminates good policy without steering readers in the Keynesian cul-de-sac?

  4. Gravatar of TravisV TravisV
    7. March 2013 at 07:14

    One of the things I’m curious about is who on this blog strongly prefers the Democrats to the Republicans. I know I sure do! I’m a big fan of Yglesias, Krugman and Ryan Avent. What’s so nice about Prof. Sumner is that he provides a lot of brilliant insights without suggesting my views are nuts. Plus, he’s said he’s a utilitarian (I’m one too).

    I’m just curious if there are any other commenters out there who strongly prefer the Democrats. I know Mike Sax does. Who else?

  5. Gravatar of J J
    7. March 2013 at 07:14

    Have you ever met/hung out with/discussed economics with Krugman in person?

  6. Gravatar of J J
    7. March 2013 at 07:23

    John Papola:

    I think Keynesianism dominated political economic thinking for a while, but that today the obsession is more with the confidence fairy. There seems to be a strong belief (mostly amongst republicans, but also amongst democrats) that if we make some small changes, then the economy will magically pick up. Even though now, more than ever, we have demand-side problems, there is such an emphasis on supply-side changes. People believe that demand is hampered by poor expectations of future supply. This is certainly very different from Keynes’ thinking that consumption depends on current income and investment on animal spirits.

  7. Gravatar of xtophr xtophr
    7. March 2013 at 07:25


    If a strong anti-preference for the current GOP counts as being ‘for’ the Democrats, count me in. But in all honesty, it seems like and endless battle between utter lunacy (R,) and fecklessness (D.)

  8. Gravatar of David Beckworth David Beckworth
    7. March 2013 at 07:27

    Scott, as you know, there was a similar bout of inflation in the 1930s despite the large output gap. So should we be too surprised to see one today?

    Here are the two periods in graphs:

  9. Gravatar of Ron Ronson Ron Ronson
    7. March 2013 at 07:31

    In an economy with sticky wages where the CB is targeting inflation and where the demand curve for labor shifts to the left (perhaps because of negative business expectations) you would expect to see that that the inflation target would be met even though RGDP falls.

    Isn’t that the most likely explanation for what has happened in the past few years?

  10. Gravatar of John Papola John Papola
    7. March 2013 at 07:38


    I’m unconvinced that we still have “demand-side” issues in the US, and by “demand-side” I solely mean deflationary excess demand for money. The pre-2008 trend, in my view, was problematic but is also pretty irrelevent 5 years since the establishment of a new trend. America now has Eurosclerosis. I could be wrong, for sure, and remain totally open to the idea that monetary policy is actually “tight” right now, whatever that truly means. But I’m unconvinced. I’m far more convinced that the EU is in a tight money death spiral.

    My point is that Scott has rightly attacked the Keynesian approach to demand as being a summary of autonomous components (C, I, G, Nx) but this sort of accounting-style analysis tends to come naturally to the language of AS/AD which dumbed down into blog posts and website articles accessible to a general reader. As such, the fallacious idea that we can or should boost “G” to “pick up the slack” for a collapse in “I” becomes very difficult to disentangle.

    My personal hobbyhorse is to return exchange itself to the center of our understanding. It’s not “demand” and “supply”. It’s exchange. To the extent that this gets lost, we lose the core of what an “economy” actually is.

  11. Gravatar of TravisV TravisV
    7. March 2013 at 07:43


    I just think that the bulk of elite Democrats, such as Obama, the Clintons, John Kerry, etc. are pretty darn reasonable. Not particularly anti-market. Neoliberal, even! Seems to me that if we had more Democrats in Congress, our policies would move loser to those of Denmark and Sweden. Growth in real GDP would’t slow down much, if at all.

  12. Gravatar of Mark Mark
    7. March 2013 at 07:50

    From Sep 2008 to Mar 2009 the C$ fell over 16% against the U.S.

    That helps inflation a bit.

  13. Gravatar of Andy Harless Andy Harless
    7. March 2013 at 07:54

    I think you can state Ryan’s argument in terms of AS/AD as follows:

    Actual inflation rates depend heavily on expected inflation; that is, the inflation rate is largely a self-fulfilling prophecy, and the AS curve is quite flat when there is high confidence in the expected inflation rate. Therefore a credible increase in the inflation forecast constitutes a downward AS shift. (The higher is expected inflation, the higher is the inflation rate associated with any given quantity of real output supplied.) Therefore, to the extent that Fed policy is successful in increasing inflation expectations, it induces a downward AS shift. So the Fed’s policy announcements affected inflation both by increasing AD and by reducing AS. Consequently the observed inflation rates were higher than we would have expected if we had only known about the AD effect.

    I think this is the only coherent AS/AD interpretation of Ryan’s argument, but I suspect that neither he nor you will like it, because it essentially revives the paradox of toil, or at least a close cousin thereof. When you view things in terms of AS/AD, it’s clear that part of what the Fed is doing by easing policy expectations is to raise AD by the mechanism of lowering AS. If AS shifts down and people expect more inflation, this lowers the real interest rate, which raises AD. This is essentially the paradox of toil: for any given inflation rate, people will do less work; therefore people will expect higher inflation; therefore there will be greater demand, and people will end up doing more work.

  14. Gravatar of TallDave TallDave
    7. March 2013 at 08:25

    Once again, as in virtually every country in Europe, there is no austerity. Government is spending more than we did last year, and far more than we did in 2007.

    In fact, we could actually eliminate the entire deficit simply by returning to the spending levels of 2007. I don’t remember that being an era of terrible privation.

  15. Gravatar of TallDave TallDave
    7. March 2013 at 08:27

    Seems to me that if we had more Democrats in Congress, our policies would move loser to those of Denmark and Sweden.

    We would have vouchers, decentralized government, and much lower corruption? You must be thinking of different Democrats 🙂

  16. Gravatar of ssumner ssumner
    7. March 2013 at 08:38

    Frederic, Data says they are sticky. Data trumps anecdotes.

    William, The drop in world trade was probably the adverse supply shock–recalculation.

    John, I agree that many people confuse AD with quantity demanded. Thus they think a positive supply shock boosts AD, even if deflationary. I prefer to define AD as a hyperbola, with constant P*Y.

    You said:

    “When the public hears about “demand”, they think about “consumers” buying stuff.”

    Yes, but this is equally true of regular S&D. Would you stop teaching S&D?

    Travis, Lots of liberals comment over here. I’d guess 20% to 25% of all commenters.

    J, Never met him. It would be lots of fun to discuss monetary economics.

    David, That’s why I said I prefer to talk about NGDP, which rose very rapidly after 1933 (not output gaps). Thus no mystery to explain. Well there was a bit of a mystery–why not an even faster recovery—but that’s explained by the NIRA.

    Ron, “Business expectations” is kind of vague. You need an AS factor–maybe I’ll do another post.

    Travis, I agree that Clinton is neoliberal—but not Obama (at least not so much).

    Mark, Good point, but then why the recession?–maybe I’ll do a post.

    Andy, I don’t think workers care about inflation, they care about NGDP. That’s why wages don’t rise when inflation rises but NGDP is stable. So when the AD curve increases, then AS increases as well. In the case of Canada, it appears both decreased, probably due to the combination of tighter money and the collapse of global trade. I’ll do a post.

  17. Gravatar of ssumner ssumner
    7. March 2013 at 08:39

    TallDave, Great point about the US Dems and the Nordics!

  18. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. March 2013 at 08:47

    ‘One of the things I’m curious about is who on this blog strongly prefers the Democrats to the Republicans.’

    Well, since this is a monetary policy blog, it seems that the best record belongs to Ronald Reagan. He supported Paul Volcker (according to Volcker in his memoir) when he squeezed inflation out of the economy in ’81-’82. Then he appointed Greenspan, who was the most successful Fed Chairman ever.

    Of course Nixon’s appointment of Arthur Burns was pretty bad too, but LBJ and Carter were just as bad. Carter may have appointed Volcker, but he didn’t begin his anti-inflationary policies until after Carter was gone.

    Bill Clinton, who was the most successful Democrat President, had the benefit of Greenspan, Reagan’s victory in the Cold War, a Republican congress to control his worst instincts, and still managed to bequeath a recession to his successor, W. He (mostly) also presided over the policies that resulted in the housing bubble.

    The most serious long-term economic problem we have is health care, and that is mostly the fault of Democrats. After all it was LBJ who started Medicare, which is clearly not sustainable as we now know it.

    Democrats have, by their unconditional support for teachers’ unions, pretty much made education a disaster for large numbers of children who don’t live in affluent suburbs. With their mania for ‘anti-discrimination’ laws Dems retarded the opportunities for the low-skilled and some minority groups.

    Democrat foreign policy preferences mostly track Dennis Rodman’s ideas. Republicans have their faults, but they don’t attract loons like Sean Penn, Demi Moore, Al Sharpton, Maxine Waters….

  19. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. March 2013 at 08:58

    You shouldn’t have gotten me started Travis, now I’m remembering some Dem economists with less than sterling pedigrees; Harry Dexter White, Lauchlin Currie, Harold Glasser, V. Frank Coe, Sol Adler, Victor Perlo, Nathan Gregory Silvermaster et al.

    If you don’t know who they were, and the sorrows they helped to introduce;

    Off-hand I can’t think of any skeletons in the Republican closet who come anywhere close.

  20. Gravatar of TravisV TravisV
    7. March 2013 at 09:08

    Good to know that I’m (mostly) in enemy territory here. 🙂

    I will say this: Prof. Sumner has done vastly more to move me to the right on a variety of issues than anyone has in the past 15 years.

    I haven’t thought about it much but maybe there really is a much bigger gulf between guys like Sumner and Yglesias / Krugman than I realize……

  21. Gravatar of marcus nunes marcus nunes
    7. March 2013 at 09:20

    (Never) mind the gap!Preferably don´t talk in terms of inflation either. Focus on Ad (NGDP):

  22. Gravatar of John Papola John Papola
    7. March 2013 at 09:36

    “Yes, but this is equally true of regular S&D. Would you stop teaching S&D?”

    Actually, I do think that a good teacher should take great pains to point out that the Marshallian model is just a model and not reality. Supply and demand curves don’t exist. We put our product on the market at a price and see what happens. It’s a dot. A change produces another dot. The curves draw in intro classes offer no more true precision than prose descriptions of what happens to changes in demand, quantity demanded, price floors, ceilings etc.

    But more to that broader point, in the “micro” model, S and D actually do represent two distinct real people converging on an exchange of one real product priced at the margin. This is not true at the macro level. The total volume of production supplied has no other “demander”. This is why I prefer to think of the aggregate as the “total dollar volume of exchange”. Put another way, money is both the key to “macro” AND essentially vanishes from view when considering the economy as a whole. We really are looking at commodities exchanging with other commodities in the aggregate, with money setting the nominal price of the total volume of exchange.

  23. Gravatar of Suvy Suvy
    7. March 2013 at 09:37

    I do like the AD/AS framework too; it’s a very solid and fundamentally sound framework and model to think about an economy. If you add in one more element–that some of the AD is endogenously controlled by the economy by the creation of debt by banks–now we have a model that fully explains the problem we have. If we define the effective demand as income plus the change in debt, we can now explain everything. The money printing by the Fed has prevented a massive deflation from taking place and stabilized demand at a decent level. However, we still do not have any sort of private sector credit demand, so AD isn’t as high as it could/should be because rising private sector debt is a natural part of a healthy economy. When you have a massively indebted society after the bursting of a asset bubble fueled by debt, you’re not going to have private sector credit demand. Ergo, you have a demand shortfall.

    Note that we also have supply shortfalls where companies are finding it difficult to fill positions that require skilled labor. We have a bunch of people unemployed that don’t have the skill requirements that are needed to be in today’s workforce while simultaneously having a demand shortfall. So yes, the AD/AS model does show the problems that we have and does so in an extremely sensible manner.

  24. Gravatar of Ron Ronson Ron Ronson
    7. March 2013 at 09:41

    “Ron, “Business expectations” is kind of vague. You need an AS factor-maybe I’ll do another post.”

    The way I see it is that on average business will demand a certain qty of labor based on expectations about future (input and sales) prices and sales volume. If there is a high degree of uncertainty that these expectations are correct then they will reduce their demand for labor at current wage rate as a precaution. This would be a shift in the AS curve.

    Under IT this may lead to business being confident about prices but unsure about sales volume. They respond by cutting output in response to these concerns and by doing so they contribute to the AD problem. If wages are sticky RGDP will fall.

    Under NGDPT business will not know future prices with any confidence (and be concerned that inflation may adjust relative prices in a way that will affect their profits) but greater confidence that overall sales volume will hold up should prevent both AS and AD from shifting so much as under IT and allow RGDP to hold up better.

  25. Gravatar of Suvy Suvy
    7. March 2013 at 09:44

    As for the note about Canada not having disinflation. It’s because they didn’t have negative credit growth like we did. Therefore, demand didn’t fall as far as it did here.

  26. Gravatar of ChacoKevy ChacoKevy
    7. March 2013 at 09:50

    I don’t think you will find traditional tribalism of left v right politics here. Most people here observe that politics has little to do with policy, and that the D and R parties are both big government parties who have competing special interest backers.
    Also, we can certainly go back and forth about economic prescriptions between the Market Monetarist and Fiscal Expansionists camps, but perhaps they have more in common than you want to acknowledge. They both believe we currently have an AD shortfall, and both would like stimulus to get us caught up back to trend. The differences begin when you consider if you want congress or the FED to provide that stimulus. (Pro-tip: there is a wrong answer to that question) 🙂

  27. Gravatar of J J
    7. March 2013 at 10:12

    Tall Dave:

    First, GDP and population in many countries are larger than they were in 2007, so it makes sense for government to spend more. Second, and more importantly, the composition of population changes over time, especially over business cycles. Certain types of people are more dependent on the government. Whether you think this is right or wrong, the fact is that to have the same level of government support over time, you need government spending to increase in recessions and to change in response to population compositional changes.

    Finally, the amount of support the government provides is not really the relevant issue when evaluating the effect of austerity on employment and output. Economies take time to adjust, so a sudden drop in government spending or increase in taxes, relative to what was expected, can create temporary unemployment. This is certainly true when the central bank provides no monetary offset.

  28. Gravatar of TravisV TravisV
    7. March 2013 at 11:31


    Thanks, I definitely agree with the Sumner critique of fiscal stimulus.

    Too see why I think there’s a lot of overlap between Sumner and Yglesias (who I LOVE) see these two commentaries:

    By Yglesias:

    By Sumner:

  29. Gravatar of TallDave TallDave
    7. March 2013 at 11:31


    Tax revenues aren’t higher, and they’re what matter. Population and GDP aren’t relevant, every government spends a different amount in both absolute and relative terms, and every country has a different GDP per capita, and they all change constantly.

    People dependent on the tax revenues of others cannot consume significantly more than those revenues indefinitely, no matter how much we care about them. It’s just math. And the absolute level of support they “need” is very arbitrary — again, look at the difference between countries.

    I agree with the monetary offset, the best approach would be to cut the budget 5% a year (real cuts, not the imaginary baseline ones everyone is worked up about) and have the Fed target NGDPLT. We could balance the budget within ten years and grow the economy.

  30. Gravatar of TallDave TallDave
    7. March 2013 at 12:02

    See, for instance, Canada, Sweden, and the Netherlands, or Japan failing at the opposite tack.

    @TravisV — “Neoliberal” is an interesting choice of term, are you American? We don’t see that word often here in the United States. It usually connotes reduction in gov’t spending though, so I’m not sure any Dem can truly qualify.

    It’s funny, I’m more or less a doctrinaire libertarian, so I usually agree with the Dems on social issues and monetary policy and the GOP on fiscal restraint. But it’s always bothered me that the information filters tend to lean Dem, so sometimes I feel like I have to lean GOP just to stand up straight.

  31. Gravatar of TheMoneyIllusion » Did a supply shock cause the Canadian recession? And did tight money make it worse? TheMoneyIllusion » Did a supply shock cause the Canadian recession? And did tight money make it worse?
    7. March 2013 at 12:10

    […] because they are affected by two common fallacies.  In the comment section of the previous post John Papola pointed out that many people don’t understand that AS and AD shocks are basically real and […]

  32. Gravatar of TravisV TravisV
    7. March 2013 at 12:16


    Let’s see, I think that having a safety net is an awesome thing. Prof. Sumner also thinks it’s legitimate.

    I think the biggest problem right now is tight money, so that means I lean Dem.

    Other than that, the big problem is government favors to the finance, energy, defense, healthcare, patent and agribusiness industries.

    I think it’s unhelpful to talk about “government spending” in the abstract. If we cut down on support for those industries, that would support government spending. I’m in favor of that big-time.

    But I do think that the concept of the safety net is totally legitimate and inequality of wealth is a big concern.

  33. Gravatar of TravisV TravisV
    7. March 2013 at 12:17

    Excuse me, if we cut down on support for those industries, that would REDUCE government spending. I’m in favor of that big-time.

  34. Gravatar of ssumner ssumner
    7. March 2013 at 13:21

    John, Certainly all models are just models, and not reality. But that doesn’t really address why some models are more confusing than others.

  35. Gravatar of John Papola John Papola
    7. March 2013 at 14:32


    Some models require a more complex set of assumptions beneath their elegant curves than others. AS/AD requires much more background and subtle caveats than S/D. I’m unconvinced that it gets us any farther towards an understanding of macro than the equation of exchange. At least MV=PT doesn’t look like a micro supply/demand cross and thus doesn’t conjure a false notion that “demand” and “supply” can be distinct in the aggregate. They can’t. They’re one and the same. The model tells a story about impacts on the price level due to real shocks (oil embargo) and nominal shocks (Arthur Burns or Ben Bernanke).

  36. Gravatar of Negation of Ideology Negation of Ideology
    7. March 2013 at 15:57

    TallDave –

    “I agree with the monetary offset, the best approach would be to cut the budget 5% a year (real cuts, not the imaginary baseline ones everyone is worked up about) and have the Fed target NGDPLT. We could balance the budget within ten years and grow the economy.”

    I suspect it would be much quicker than 10 years. Evan Soltas had a post estimating that about $1 Trillion of the deficit is due to the recession, which of course is caused by low NGDP. I suspect the deficit would be close to balanced in the near term with NGDPLT alone. Of course, we’d still have to deal with growing health and retiree costs for the long term deficit.

  37. Gravatar of Andy Harless Andy Harless
    7. March 2013 at 17:10


    …when the AD curve increases, then AS increases as well

    This sounds 180 degrees wrong to me. Whether you draw the curves in the conventional space of inflation vs. RGDP or in some less conventional space such as NGDP vs. employment, there is a well-known ratcheting effect whereby rightward shifts in AD elicit leftward shifts in AS. This is the old insight of Phelps and Friedman from the 1960’s, which was realized in the 1970’s. AD shifted to the right in the late 1960’s, and then AS shifted to the left. AD shifted to the right again in the early 1970’s, and then AS shifted to the left again. AD shifted to the right yet again in the late 1970’s, and then AS shifted to the left yet again. By the time 1981 came around, the AS curve was way out of kilter, and accordingly, the policy to bring NGDP growth back to normal resulted in a huge recession, even though downward-sticky nominal wages were completely irrelevant.

    My interpretation of Ryan Avent is that the Fed has essentially been trying (successfully) to repeat what it did in the 1970’s, but on a smaller scale, starting from a lower inflation rate, and with most of the action taking place in the unobservable minds of agents rather than in the observable macro statistics. By repeatedly signalling its commitment to keep the inflation rate from going much below 2%, the Fed pushes up nominal expectations and thereby prevents the reverse-ratcheting effect which would, in a simple adaptive expectations model, result in a deflationary spiral.

  38. Gravatar of TallDave TallDave
    8. March 2013 at 09:42


    Across-the-board cuts are fine with me.

    I would also like to eliminate those “favors” especially waste like the trillion-dollar JSF that is unnecessary and doesn’t work very well, crop subsidies, the billions thrown at “green” energy and the billions more in “green” tax breaks.

    Everyone likes a safety net, the question is always how much we can afford. By the standards of 1950s America or modern-day Latvia, our safety net is incredibly generous. (It’s actually more generous than nearly all of Western Europe — our Social Security and Medicare tends to be pay for more, and I know people on Medicaid working on their second million in benefits).

  39. Gravatar of ssumner ssumner
    9. March 2013 at 07:27

    John, The equation of exchange is not a model at all, it’s a definition. I don’t see how it could possible replace AS/AD.

    How about a compromise: AS/MV

    Andy, Yes, that was a typo, I meant more AD means less AS. The AS curve shifts upward, which is a decrease.

  40. Gravatar of Sumner on Supply vs. Demand Side Shocks | Last Men and OverMen Sumner on Supply vs. Demand Side Shocks | Last Men and OverMen
    22. February 2017 at 09:43

    […] they are affected by two common fallacies.  In the comment section of the previous post John Papola pointed out that many people don’t understand that AS and AD shocks are basically real and […]

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