The New York Fed vs. Larry Summers

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The conclusion of a New York Federal Reserve article on how much of the current inflationary spurt is due to supply bottlenecks is worth reading for a not-so-subtle debate. Hats off to mike green for the place.

The current debate over the Federal Reserve’s ability to engineer a soft landing must unravel the drivers of US inflation. Our work shows that inflation in the United States would have been 6% instead of 9% at the end of 2021 without supply bottlenecks. Our quantitative results explain why some experts were wrong to predict a transitory surge in inflation, when others were right to predict high inflation, but for the wrong reasons. In other words, the fiscal stimulus and other aggregate demand factors would not have pushed inflation so high had it not been for the pandemic-related supply constraints. In the absence of any new energy or other shocks, it is therefore possible that the ongoing easing of supply bottlenecks will lead to a substantial drop in inflation in the short term.

That’s what we underline in bold, but the New York Fed hyperlinks. The first takes you to a Paul Krugman mea-culpa, and the second – about pundits who were right about high inflation but for the wrong reasons – takes you here:

Ouch. For the econ nerds, here is a link to the full research paper by Julian di Giovanni from the NY Fed, Sebnem Kalemli-Ozcan and Alvaro Silva from the University of Maryland and Muhammed Yildirim from Harvard, rather than just the blog summary from the NY Fed. Clearly, whether we have truly passed peak inflation is a hot topic right now.

Update: As the generic disclaimer on the Fed’s Liberty Street Economics blog says, “The views expressed in this article are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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