Models

The problem with most stories is that they’re just words. With just words its easy to sound like you’re making sense, that the one thing you said leads to the other. For example, Ryan Avant says we need more stimulus and so does Scott Sumner (e.g. ?).

So, we have increasing inflation and GDP. Understanding the limited ability of policy makers to fine tune the economy, what model under conditions of increasing inflation and increasing GDP recommends more stimulus?

Speaking of which, I’m embarrassed to say that I have no idea why unemployment is a lagging indicator, but I do know that it has been so for a long time. This means high (but decreasing?) unemployment isn’t necessarily an indicator of insufficient aggregate demand.

8 thoughts on “Models”

  1. Okun’s Law or the Taylor Rule. Basically any model where we will have significant output gaps now and in the immediate future.

  2. The Taylor rule is a model of the Fed. I don’t think there’s a Taylor rule with unemployment without having Okun’s Law, but my point was that we still have a large output gap. Is there any model where increasing inflation and increasing output means there shouldn’t be stimulus? Naturally some models say there should be no stimulus at all, but I’m not familiar with models that care about the change and not the level as being optimal.

  3. “what model under conditions of increasing inflation and increasing GDP recommends more stimulus?”

    AS/AD model when far from full employment. Olivier Blanchard says this is his go-to model when giving policy advice.

  4. The models you guys mention suggest there should be stimulus and of course I agree. My question was about increasing AD stimulus (e.g. changes in the interest rate) when we’re seeing increasing inflation and increasing GDP.

    One answer could be, well, we weren’t stimulative enough. Which was probably true, but with increasing inflation and increasing GDP can we still say we’re not stimulating enough? (see my latest post for a model that gives a Taylor rule, from first principles, with unemployment instead of gdp… you’ll notice in that model unemployment is a lagging indicator if the Fed puts too little importance on unemployment. But even under optimal policy unemployment is very persistent.)

  5. I was under the impresson that at least some of the lag in employment recovery was due to search costs.

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