A model in which prices respond to slack instead of marginal costs explains well three key facts about post-pandemic inflation dynamics in the United States.
I do not have the technical expertise to judge this model. I like what it claims for itself because it _derives_ “full” employment from an optimizing model. [I have my doubts about the model’s optimand (what is being optimized), but the idea/approach seems totally correct.]
I also like the implication of deriving a Philips Curve instead of “observing” it empirically. Search cost feels like a better explanation of asymmetric and heterogenous price stickiness that creases any Phillips Curve at all.
I’d be more comfortable with a model that did not make unemployment of “labor” qualitatively different from the failure of any other market to clear. I think this is same thing as saying I wish it were explicitly multisectoral as is implicit in search cost function.
I ALSO like undermining the Neo Keynesian ZLB as a policy relevant issue.
“The crux is that the Phillips curve goes through the point of divine coincidence, where inflation is on target and unemployment is efficient”
Shouldn’t that be the “definition” of “divine coincidence,” the kind of inflation rate the CB should target?
"The existence of such divine coincidence is crucial for central banks like the Federal Reserve that aim to balance full employment with price stability. It implies that the dual mandate is actually achievable."
I agree but do not see that as fundmentally novel unless (and I do not think that is what the authors are saying) they mean that full employment of everything – all or a maximum value of markets clearing – can be achieved at any arbitrary inflation target. But opening up a conceptual way to find the income-maximizing target inflation rate (and trajectory back to target when away from the optimum?) is novelty enough!
I do not have the technical expertise to judge this model. I like what it claims for itself because it _derives_ “full” employment from an optimizing model. [I have my doubts about the model’s optimand (what is being optimized), but the idea/approach seems totally correct.]
I also like the implication of deriving a Philips Curve instead of “observing” it empirically. Search cost feels like a better explanation of asymmetric and heterogenous price stickiness that creases any Phillips Curve at all.
I’d be more comfortable with a model that did not make unemployment of “labor” qualitatively different from the failure of any other market to clear. I think this is same thing as saying I wish it were explicitly multisectoral as is implicit in search cost function.
I ALSO like undermining the Neo Keynesian ZLB as a policy relevant issue.
“The crux is that the Phillips curve goes through the point of divine coincidence, where inflation is on target and unemployment is efficient”
Shouldn’t that be the “definition” of “divine coincidence,” the kind of inflation rate the CB should target?
"The existence of such divine coincidence is crucial for central banks like the Federal Reserve that aim to balance full employment with price stability. It implies that the dual mandate is actually achievable."
I agree but do not see that as fundmentally novel unless (and I do not think that is what the authors are saying) they mean that full employment of everything – all or a maximum value of markets clearing – can be achieved at any arbitrary inflation target. But opening up a conceptual way to find the income-maximizing target inflation rate (and trajectory back to target when away from the optimum?) is novelty enough!