Sunday, February 26, 2017

Drawing conclusions from a conceptual framework

"Conceptual framework" by Alan Blinder:

At any given moment, there is a core inflation rate toward which the actual inflation rate tends to gravitate. This rate is determined by fundamental economic forces, basically as the difference between the growth rates of aggregate demand and aggregate supply.

Conclusions by Scott Sumner:

I hope that we can both agree that slow growth in AS did not cause the high inflation of the 1970s. Yes ... inflation was completely demand-side.


jim said...

The US reached peak oil in 1970. Before that both demand and supply moved in tandem and increased at an exponential rate that doubled every 10 years.

Before 1970 the price of oil hardly went up at all.
After 1970 US-produced supply started to drop while demand went on increasing. In the next 40 years there was a 6000% increase in oil
price (averaging 11% per year) before supply and demand were once again close to matching as they did before 1970. Its hard to imagine what other way supply and demand can be reconciled without the inflation in price.

Obviously oil price (energy price) played a role in post 1970 inflation rates.
However I would agree that financialization was a bigger influence on inflation. However, a lot of the increase in financialization was also
tied to deficit in the supply and demand for oil and other imported goods. The mismatch between US imports and exports (half of which was oil) meant the US sent a lot of dollars (trillions) overseas and a substantial amount of that money found its way back to US financial institutions and was invested in interest bearing financial assets. In other words, some entity in the US economy would borrow and spend it back into the US economy and that contributed to inflation (and contributed to debt and economic growth also).

The Arthurian said...


In the notes I made for myself on the Alan Blinder quote, I wrote:
it is like they have simplified the economy down too much.
You solved that problem! It is nice and complicated now :)

Makes sense, though. Thank you Jim.

The Arthurian said...

I just noticed the connection between this post and this one. I cannot deny that AS and AD ("supply and demand") are absolutely fundamental to economic thought. But I cannot accept the omission of money and monetary exchange from economic thought.

And I still think conclusions should arise from facts, not from conceptual frameworks.