Kevin Gets Acknowledged by a Real Economist
As I have written before, one of my goals is to resolve the differences between Arnold Kling’s and Scott Sumner’s views on macroeconomics. There is now some evidence that I may actually understand what is going on.
Will Ambrosini, wrote about a Blanchard and Gali paper that combines two standard macroeconomic models and then simulates various shocks to the economy. The interesting bit is when they look at a “real” shock: a decrease in productivity of 1%. This corresponds to one of Kling’s “recalculation” events where the economy has to figure out how to redeploy resources.
Well, the result depends on the monetary policy used by the Fed. If the Fed targets just inflation, unemployment spikes almost 10 percentage points before gradually improving. Sound familiar? But if the Fed targest both inflation and unemployment, unemployment only goes up a little over 1 percentage point.
My intuition was that targeting inflation and unemployment is similar to targeting NGDP as Sumner advocates. I sent him email to see if I was right and lo and behold, Sumner posted about it, acknowledging that my intuition lines up with his. So I guess I’m getting a handle on this stuff.
In addition to the ego gratification, this also resolves the tension between Kling and Sumner. Yes, real shocks require recalculation. But monetary policy can make the recalculation easier or harder. Think of money as the lubricant in the recalculation engine. If you put more in, there is a lot less friction and waste heat.