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Great post. Nothing to add.

Good to see you back, Nick!
Your post is insightful as always, and the framework makes sense.
Still, I'd like to try harder to 'steel man' the case for running hot, which its proponents often don't make explicit.
I see a few variants of the argument:
1) a view that growth in the economy's potential is not exogenous to macro policy, and that periods of time where AD is strong can catalyze increases in TFP. I have no idea what evidence there would be for this, but this would be the case for small overshoots vs a steady path for rate of inflation as you advocate.
2) a distributional view that workers have more bargaining power over real wages when unemployment is tight to the lower constraint, and perhaps a dynamic view that times such as these draw more of the long-term unemployed into the workforce with some lasting benefit
3) a view that in recoveries, central banks like the Fed have been generally premature to 'take away the punch bowl' and undershoot their target, and since CBs dont have perfect knowledge of economic conditions or perfect control over the price level, restraint on tightening is on balance the most prudent course, with risk of a temporary overshoot on inflation seen as less concerning than risk of keeping employment lower than it potentially could reach.

In some ways, Greenspan's restraint from tightening policy in the mid-1990s, tolerating the possibility of being 'late' to tamp down acceleration in inflation in order to feel out the 'true' NAIRU is the paradigm for this approach.

Thanks Scott!

Thanks louis!
Let me try to respond:

1. If we had *very* strong "hysteresis", so that a positive shock, driving the unemployment rate down temporarily by 1%, would let us keep the unemployment rate *permanently* lower by 1%, we would have multiple Long Run Phillips Curves. That makes policy a bit trickier then just stabilisation, because we want an initial shock to get us on the best LRPC, then stabilisation thereafter to keep us there. But if the hysteresis is just that TFP growth is higher when unemployment is lower, I don't think that affects the policy conclusions in this post.

2. There's a very old debate on whether real wages are procyclical or countercyclical. AFAICT, it depends on whether wages or prices are stickier, plus labour force compositional effects, plus lots of measurement problems. But I can't get really excited about the answer, from a policy perspective, because recessions are bad regardless of what happens to real wages. And the important distributional issue is the unemployment itself, which tends to hit the poorer hardest, and less the real wages of those who remain employed.

3. Well, if the CB undershoots 2% on average, it becomes a de facto 1.5% (or whatever) inflation target. Which the economy (and expectations) eventually adjusts to. And whether that's better or worse than a 2% or 3% target is really another question about whether the LRPC is vertical or not. But a Price-level path target would have an advantage in holding CB's accountable for fixing their past mistakes in targeting inflation, so that one-sided errors can't keep on accumulating.

Wages tend to be countercyclical when the economy is impacted by demand shocks and procyclical when impacted by supply shocks. That supports the claim that wages are especially sticky:


Shorter version: Never reason from a price change.

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