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Inflation or no inflaton coming | Econobrowser

James at Econobrowser always offers insightful views on the economy. This post deals with the prospect for the current hot topic, of inflation or not. My read is that earlier inflation is the more likely prospect, given sectoral imbalances are more likely than not.

Will stimulating nominal aggregate demand solve our problems?

My personal view is that real-world unemployment arises from the interaction of sectoral imbalances with frictions in the wage and price structure of the sort documented by Truman Bewley and Alan Blinder. The key empirical test, in my opinion, is at what point inflationary pressures begin to pick up. If Krugman is correct, we could have much bigger monetary and fiscal stimulus without seeing any increase in inflation. If the sectoral imbalances story is correct, it would be possible for inflation to accelerate even while unemployment remains quite high.

Written by Colin Henderson

October 7, 2009 at 23:12

Posted in Uncategorized

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