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Inflation is much more complicated than the basics they teach you in the first two years of university Econ. We have a set of broad stroke theories that apply o

Inflation is much more complicated than the basics they teach you in the first two years of university Econ. We have a set of broad stroke theories that apply on a macro level in various circumstances. These theories often contradict one another and it is not always clear which one should be the dominant force at any given time. At a fundamental level out understanding of this is imperfect at best and at a practical level it is pretty obvious that central bankers do not have a complete grasp of the central concept that they devote their lives trying to control.

johntiger1 3y ago
Could you explain more about which specific theories contradict one another?
- mitthrowaway2 3y ago
  I'll offer one example: Neo-Fisherism and New Keynesianism directly contradict in their assessment of the impact of interest rates on inflation. https://www.stlouisfed.org/on-the-economy/2016/november/neo-fisherism-unconventional-monetary-policy https://www.stlouisfed.org/on-the-economy/2016/november/neo-... It appears that the relationship between interest rates and inflation is still an open question in economics, which is kind of fascinating, because it's like trying to drive a moving car when the relationship between the speedometer and the brake pedal is still being debated by experts. There are similar debates when it comes to employment. Is a high level of employment inflationary? The established wisdom of the Phillips curve is that it is, because low unemployment leads to high labour bargaining power which leads to wages rising faster than productivity, which results in inflation. But there are many economists wondering if it's not the other way around, because people are employed to produce in-demand goods, while unemployed people don't produce goods but still need to eat. These unresolved questions create questions around the inflationary impacts of eg. a jobs guarantee (https://en.wikipedia.org/wiki/Job_guarantee https://en.wikipedia.org/wiki/Job_guarantee) relative to a universal basic income (https://en.wikipedia.org/wiki/Universal_basic_income https://en.wikipedia.org/wiki/Universal_basic_income) have some economists arguing for and others against. There is no widespread consensus about the outcomes of such policies.
  - rightbyte 3y ago
    > It appears that the relationship between interest rates and inflation is still an open question in economics Thanks. I have never understood why a zero sum interest would lower inflation. Or why fewer employed poatoe farmers would make potaties cheaper. And people talk about it like it was obvious but can never explain.

johntiger1 3y ago

Could you explain more about which specific theories contradict one another?

mitthrowaway2 3y ago
I'll offer one example: Neo-Fisherism and New Keynesianism directly contradict in their assessment of the impact of interest rates on inflation. https://www.stlouisfed.org/on-the-economy/2016/november/neo-fisherism-unconventional-monetary-policy https://www.stlouisfed.org/on-the-economy/2016/november/neo-... It appears that the relationship between interest rates and inflation is still an open question in economics, which is kind of fascinating, because it's like trying to drive a moving car when the relationship between the speedometer and the brake pedal is still being debated by experts. There are similar debates when it comes to employment. Is a high level of employment inflationary? The established wisdom of the Phillips curve is that it is, because low unemployment leads to high labour bargaining power which leads to wages rising faster than productivity, which results in inflation. But there are many economists wondering if it's not the other way around, because people are employed to produce in-demand goods, while unemployed people don't produce goods but still need to eat. These unresolved questions create questions around the inflationary impacts of eg. a jobs guarantee (https://en.wikipedia.org/wiki/Job_guarantee https://en.wikipedia.org/wiki/Job_guarantee) relative to a universal basic income (https://en.wikipedia.org/wiki/Universal_basic_income https://en.wikipedia.org/wiki/Universal_basic_income) have some economists arguing for and others against. There is no widespread consensus about the outcomes of such policies.
- rightbyte 3y ago
  > It appears that the relationship between interest rates and inflation is still an open question in economics Thanks. I have never understood why a zero sum interest would lower inflation. Or why fewer employed poatoe farmers would make potaties cheaper. And people talk about it like it was obvious but can never explain.