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Thursday, April 07, 2011

Same Old Same Old

Matthew Yglesias writes about monetary policy. I object again (this is objection 2 "there is no stable non expectations augmented Phillips curve" not objection 1 "It matters whether or not we are in a liquidity trap")

He writes

4.27 percent unemployment in 2020.

Now 4.27 isn’t totally impossible, but it still ignores the past several decades worth of Federal Reserve practice. The way things work, when unemployment gets to the neighborhood of five percent, up go the interest rates in an effort to restrain wage growth by creating labor market slack. This may be a bad idea—I think there’s some reason to think it is a bad idea—but it’s a monetary policy and central bank governance issue, not a budget issue

Now he doesn't quite say that with different monetary policy it would be reasonable to forecast 4.27% not only in 2020 but steadily around that in 2019 and 2021 etc, but he doesn't show any interest in the idea that, for any monetary policy, one can have 4.27% unemployment only in an extraordinary year (one with extraordinarily high money supply growth which means extraordinary given the policy whatever it might be).

I comment.

As long as you keep saying things about the effects of monetary policy which are accepted by roughly 0% of macroeconomists, I will keep mentioning in commments that roughly 100% of macroeconomists think you are full of it. I will always admit that a) I'm a macroeconomist and b) I'm not sure if I agree with you or with the other roughly 100% of macroeconomists.

The view of almost all marcoeconomists is that there is a natural or non inflation accelerating rate of unemployment and that the average rate of unemployment over a long period of time can not be lower than that rate no matter what the monetary authority does. Many think that, if the monetary authority is incompetent and inflation and unemployment fluctuate then the average rate of unemployment can be higher (because the expectations augmented Phillips curve is convex). At least one Nobel prize winning macroeconomist (Ed Prescott) thinks that monetary policy doesn't affect the unemployment rate at all. But roughly 0 macroeconomists think that, if only the Fed didn't care so much about inflation, we could reasonably forecast unemployment below the natural rate.

Of course even orthodox new Keynesian macroeconomists disagree about what that natural rate is. Some might think that 4.85 % is reasonable (most guesses are over 5%). Only the lunatic fringe (including me) doubts that the very concept of a natural rate of unemployment is useful.

Just as you have decided that it doesn't matter whether we are in a liqudiity trap, you have decided to state as obviously correct and non controversial the old view of a long term tradeoff between unemployment and inflation which was universally abandoned by anyone willing to look at data over 35 years ago (I'm not convinced that anyone except for you and straw men every really believed that -- certainly the incriminating quotes are both vague and very carefully edite).

Look I agree progressives should write about monetary policy. However, I think progressives should pay at least minimal attention to what economists (all economists) say about monetary policy before writing about it.

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