Tuesday, March 28, 2017

Something else

Syll quotes Wren-Lewis:

If we really think there is no relationship between unemployment and inflation, why on earth are we not trying to get unemployment below 4%? We know that the government could, by spending more, raise demand and reduce unemployment. And why would we ever raise interest rates above their lower bound? …

There is a relationship between inflation and unemployment, but it is just very difficult to pin down. For most macroeconomists, the concept of the NAIRU really just stands for that basic macroeconomic truth.

Okay. And Syll quotes Daniel Kahneman:

I have had several occasions to ask founders and participants in innovative start-ups a question: To what extent will the outcome of your effort depend on what you do in your firm? This is evidently an easy question; the answer comes quickly and in my small sample it has never been less than 80% … They are surely wrong: the outcome of a start-up depends as much on the achievements of its competitors and on changes in the markets as on its own efforts …

There's a relation between "the outcome of your effort" and "what you do in your firm". Asked the question, anyone with an ego would find it a strong relation. But Kahneman suggests that people tend to overlook other strong relations such as the outcome of competitors' efforts, and market saturation.

Your own efforts are not the only thing, Kahneman says. There is something else: the environment in which you operate.


There's a relation between unemployment and inflation. It's a strong relation. Simon Wren-Lewis that this relation is "difficult to pin down". Syll quotes him again:

The concept of the NAIRU, or equivalently the Phillips curve, is very basic to macroeconomics. It is hard to teach about inflation, unemployment and demand management without it. Those trying to set interest rates in independent central banks are, for the most part, doing what they can to find the optimal balance between inflation and unemployment.

Syll has a lot more trouble with this quote than I do. For me it is an opportunity to point out that achieving "the optimal balance between inflation and unemployment" may depend on something other than inflation and unemployment.

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