Wednesday, February 27, 2008

More on the tired Aggregate Supply curve

As a total n00b in the blogosphere, it's nice when one finds that the big shots and little-oneself are aligned. A little under a week ago, I typed my thoughts on the slowing of the AS curve, as opposed to AD-based slowdown or even stagflation, and the policy implications of seeing things this way. And today... Samuelson himself writes on The Specter of Stagflation! OMG, I feel like a groupie watching the concert from the backstage.

p.s. Thanks to Greg Mankiw for the pointer!

p.s.2. But seriously, the one point where I'd disagree with Samuelson, at least in emphasis: it seems to me that the current situation is one of an AS curve expanding more slowly than the AD curve. Inflation is not, right now, not yet, strictly speaking a monetary phenomenon, but one driven by rising input costs (directly and via imported goods). We may, in fact, still be in the arena of price shocks rather than inflation itself. It's might seem like picking at straws, but there it is: not all periods of increasing prices are really inflation, but when rising prices get entrenched in expectations, it's inflation alright. So it's from here on when the Fed's policy (specially when combined with an expansionary fiscal policy) can drive these rising prices into inflationary expectations or not. And then it would be a monetary issue, and be stagflationary, and be another case of "the more something changes..."

p.s.3. How do y'all think Bernanke is evolving on this issue? Answer's here. Some interesting (and scary) back-of-the-envelope results by Larry White.

UPDATE (a few hours later): As usual, James Hamilton illuminates the issue... and did so six days ago (he's the one who makes me wish I had studied more time-series metrics). Need more time to keep up with'em blogs!

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