Sunday, August 19, 2012


Tim Duy quotes Joe Gagnon of the Peterson Institute for International Economics:

For more than two years, the Fed has dragged its feet and resisted the obvious need for more aggressive action...

...A large majority of the committee projects that inflation will be below target over the next two and a half years. If they assign any weight to their employment objective, they should be willing to accept inflation at least modestly above target in order to get a better outcome on employment.

Duy's initial reaction: "Considering that more aggressive action has not been taken, monetary policymakers appear to disagree."

My initial reaction: The idea of relying on this trade-off -- accepting higher inflation to get lower unemployment -- is shudderingly simplistic.

Oh, I know: It's just the Phillips curve. And yes, I embrace the Phillips curve. But hey, don't think of it as a "curve". Think of it this way:

One of the arrows is "More Unemployment (Less Inflation)". The other arrow is "Less Unemployment (More Inflation). And that circle in the middle, that's us. Policy slides us a little more to the left, or a little more to the right. And policy discussions like Joe Gagnon's and Tim Duy's talk about where the circle ought to be.

If we were Flatlanders living in that circle, or if we were living somewhere on the actual Phillips curve, we could not tell the difference. (That was the point of the book Flatland.) So what I'm saying here is that really, the Phillips curve is two-dimensional. The Phillips trade-off is two-dimensional. And the argument about whether we should favor more inflation or more unemployment is two-dimensional.

One-dimensional, maybe.

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