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Hi Nick,

Along these lines, frictions and stuff you might be interested in this guy:


A couple nice papers about consumption also being subject adjustment frictions, that is, being sticky.

Maybe another limit to growth at the micro-level is what is going to happen with CAD/USD exchange rates and Canadian interest rates. The flight to quality has the perverse effect of making USD stronger when they are in the crapper. Normally with a strong CAD you might want to encourage consumption of foreign goods and services like tourism and finance sector taking over USA banks, encouraging productivity increasing capital investments (from USA manufacturers). And with weak dollar obviously manufacturing gets a boost.
Now, I can't imagine businesses and public entities have any idea what the exchange rates and interest rates will be over the short to medium term (over long-term, debt must still rule?).

Why would the speed limit matter? Do central bankers still think it is their job to target real GDP? If so, then I'd think we are in real trouble. If they target inflation at 2% or NGDP at 5% or any other nominal variable, then there is no need to worry about speed limits. Or am I missing something? Are those nominal aggregates inappropriate targets for a mid-sized open economy like Canada?

Adam: Good link (as always, you find them)! I like Chetty's view that "habit persistence" in consumption can be explained in terms of transactions costs and technology of the goods themselves, rather than just a primitive psychological propensity.

I have the same sort of idea at the back of my mind to explain "output persistence" -- transactions costs of hiring new inputs quickly. Or maybe just the time it takes for goods to flow through the supply chain from raw materials to finished products in the stores. We always ((almost?) model y as adjusting instantly to AD, (while allowing that P takes longer), but it is unlikely it does.

Phillip: you are right. I want to generalise your point. More generally (because it is not just the mix between net exports and domestic absorption that might change), when AD expands (whether due to monetary, fiscal policies, or whatever) it is unlikely that the mix of increased demand between different goods will be exactly the same as the mix of existing excess supplies. So resources will need to switch between sectors. And this may take time.

Scott: deeply ingrained at the back of my mind is the unspoken assumption that the central bank targets 2% CPI inflation! (And that fact alone is some measure of the Bank of Canada's success in anchoring 2% inflation into our habits of thought as a quasi-constitutional guarantee.) Given that, they do need to worry about the short-run speed limit, in interpreting the data.

But more generally, I'm just saying that we shouldn't be surprised if inflation starts to pick up even if unemployment has not yet returned to normal. It won't mean we have already hit the natural rate.

speed limits matter in calibrating the policy response that is needed to return the economy to the inflation target.

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