As global supply chains fray and the economy veers towards recession, the Federal Reserve faces a different spin on a recent problem — one it can’t fully fix.
Not exactly central to the point here, but: what do you make of the argument that the level shift in trend NGDP growth implies that demand played a meaningful role in 2021-2023? I find it compelling but maybe that’s because I don’t really understand basic NK dynamics.
Methinks your "output" here in Figure 5 is "output relative to potential". I would recommend you either relabel, or have it drop and recover (for the temporary tariff case) or drop and stay down (for the permanent case), or there may be confusion...
'You can see the supply shock in the top line. In the first scenario, you see the Fed raise rates (A) and cause a recession (B). In the other scenario, the Fed not adjusting interest rates leads to a one-time shift in the price level (C)(remember these are rates), while output remains stable. Again, this is not calibrated, but Treasury estimates at the tail-end of the Biden administration thought you’d need unemployment to hit about 10% to 14% - above the Global Financial Crisis! - to keep the pre-pandemic price level on track. Now, consider a one-time reversed and permanent supply shock scenario, with the Fed looking through both...
One cannot trust the bogus inflation numbers produced by the government that continue to be "understated."
Great post.
Not exactly central to the point here, but: what do you make of the argument that the level shift in trend NGDP growth implies that demand played a meaningful role in 2021-2023? I find it compelling but maybe that’s because I don’t really understand basic NK dynamics.
Methinks your "output" here in Figure 5 is "output relative to potential". I would recommend you either relabel, or have it drop and recover (for the temporary tariff case) or drop and stay down (for the permanent case), or there may be confusion...
Otherwise: THIS IS SO GREAT!! Yours, Brad DeLong
> Mike Konczal: <https://mikekonczal.substack.com/p/the-federal-reserve-vs-the-tariff>:
'You can see the supply shock in the top line. In the first scenario, you see the Fed raise rates (A) and cause a recession (B). In the other scenario, the Fed not adjusting interest rates leads to a one-time shift in the price level (C)(remember these are rates), while output remains stable. Again, this is not calibrated, but Treasury estimates at the tail-end of the Biden administration thought you’d need unemployment to hit about 10% to 14% - above the Global Financial Crisis! - to keep the pre-pandemic price level on track. Now, consider a one-time reversed and permanent supply shock scenario, with the Fed looking through both...