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1. Tilting at Windmills: Bernanke and Blanchard’s Obsession with the Wage-Price Spiral

Author:
Servaas Storm
Publication Date:
04-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Bernanke and Blanchard (2023) use a simple dynamic New Keynesian model of wage-price determination to explain the sharp acceleration in U.S. inflation during 2021-2023. They claim their model closely tracks the pandemic-era inflation and they confidently conclude that “… we don’t think that the recent experience justifies throwing out existing models of wage-price dynamics.” This paper argues that this confidence is misplaced. The Bernanke and Blanchard is another failed attempt to salvage establishment macroeconomics after the massive onslaught of adverse inflationary circumstances with which it could evidently not contend. It misrepresents American economic reality, hides distributional issues from view, de-politicizes (monetary and fiscal) policy-making, and sets monetary policymakers up to deliver significantly more monetary tightening than can be justified on the basis of more realistic model analyses.
Topic:
Economics, Monetary Policy, Inflation, Macroeconomics, and Wages
Political Geography:
North America and United States of America

2. Good Policy or Good Luck? Why Inflation Fell Without a Recession

Author:
Thomas Ferguson and Servaas Storm
Publication Date:
09-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyzes claims that the Federal Reserve is principally responsible for the decline of inflation in the U.S. We compare several different quantitative approaches. These show that at most the Fed could plausibly claim credit for somewhere between twenty and forty percent of the decline. The paper then examines claims by central bankers and their supporters that a steadfast Fed commitment to keeping inflationary expectations anchored played a key role in the process. The paper shows that it did not. The Fed’s own surveys show that low-income Americans did not believe assurances from the Fed or anyone else that inflation was anchored. Instead, what does explain much of the decline is the simple fact that most workers nowadays cannot protect themselves by bargaining for higher wages. The paper then takes up the obvious question of why steep rises in interest rates have not so far led to big rises in unemployment. We show that recent arguments by Benigno and Eggertson that shifts in vacancy rates can explain this are inconsistent with the evidence. The biggest factor in accounting for the strength in the economy is the continuing importance of the wealth effect in sustaining consumption by the affluent. This arises, as we have emphasized in several papers, from the Fed’s quantitative easing policies. Absent sharp declines in wealth, the continuing importance of this factor is likely to feed service sector inflation in particular.
Topic:
Economics, Monetary Policy, Federal Reserve, Inflation, and Macroeconomics
Political Geography:
North America and United States of America

3. Macroeconomic Modeling in the Anthropocene

Author:
Yannis Dafermos, Andrew McConnell, Maria Nikolaidi, Servaas Storm, and Boyan Yanovski
Publication Date:
10-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Recent years have seen an increasing use of environmental dynamic stochastic general equilibrium (E-DSGE) models for analyzing the macroeconomic effects of the climate crisis. This paper explores to what extent these models are fit for purpose. We identify the limitations of the benchmark E-DSGE framework and explain how these limitations restrict the ability of this framework to meaningfully capture the macroeconomics of the climate crisis. We then explain how the assumptions behind these limitations can be relaxed, but argue that simply relaxing some of these assumptions in isolation is insufficient to address the problem. We therefore call for a broader use of other macroeconomic models, such as ecological stock-flow consistent (E-SFC) and ecological agent-based (E-AB) models, that address these limitations simultaneously. We explain how these models do not suffer from the pitfalls of the E-DSGE framework and outline how they need to improve to increase their usefulness as tools that can inform macroeconomic policy making in the Anthropocene.
Topic:
Climate Change, Environment, Monetary Policy, and Macroeconomics
Political Geography:
Global Focus