by Tyler Cowen
on June 27, 2013 at 11:37 am
His overall conclusion is that adverse supply shocks have undesirable effects for economies even when they are at the interest rate zero lower bound.
That is from James Hamilton, citing and discussing research by Johannes Wieland.
“adverse supply shocks have undesirable effects for economies”: go on!
I suppose one man’s supply is another man’s sales.
Supply shocks that didn’t lead to inflation provide evidence that inflation isn’t helpful at the ZLB? It seems like he’s ignoring something important that might explain why the supply shock didn’t actually lead to inflation. Maybe demand?
I think you’re reading him wrong – it did lead to inflation but not to higher RGDP.
I posted a reply on Econobrowser but it hasn’t cleared with the editor yet. Or else they decided not to post it. IMO, this is why I am not convinced by MMers. Yes, an adverse shock is not quite the same thing as artificially debasing your currency: the destruction of supply capacity is real. So I agree that it’s not proof against QE infinity or Japan style re-inflation policy. But it is showing that inflation does not somehow trigger consumer spending or capital investment – at least not at such a rate that it would boost RGDP.
I talked about this here, if you care to take a look: http://theredbanker.blogspot.com/2013/06/on-scott-sumner-monetary-policy.html
The inflation he gets, for the U.S. at least, is because he’s looking at YOY% change that’s mostly reflecting 6 months of no inflation in the first half of 2010. Inflation from the shock should be visible MOM, which I don’t see in the Fred data.
What I found is interesting is this sentence:
“When consumers borrow at a different interest rate from the federal government, it is no longer appropriate to talk about what a given development does to “the” real interest rate.”
Since the government can borrow more cheaply than individuals, it sounds like this should support government stimulus programs.
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