October 25, 2005
Why Oh Why Can't We Have a Better Press Corps?
Yes, it's another National Review edition! Larry Kudlow writes appropos of Ben Bernanke's nomination to be Chair of the Federal Reserve:
The Corner on National Review Online : Thank heavens that Fed board member Donald Kohn, who is a demand-sider and a Phillips Curver, did not get the nod.
But Ben Bernanke is a demand-sider and a Phillips Curver. Here's a representative speech:
FRB: Speech, Bernanke--An unwelcome fall in inflation?--July 23, 2003: Much of the analytic framework used by the [Federal Reserve] staff and other leading forecasters can be summarized by an expectations-augmented Phillips curve, of the type implied by the work of [Milton] Friedman (1968) and [Ned] Phelps (1969), further augmented by measures of "supply shocks," as suggested for example by the work of Robert Gordon (for a recent application, see Gordon, 1998). This model is familiar from many textbook treatments. In addition, most variants of the model include dynamic elements, in order to capture aspects of expectations formation, multi-year contracts, and other factors.... If aggregate demand is below potential output, implying a positive output gap, the rate of increase in labor compensation and other input costs should slow, firms should be less able to pass price increases, and thus inflation should slow.... Of course, this model, like any model, will have an error term, which represents a portion of the behavior of inflation that we can't reliably explain or predict.... You may have noted that I did not include money growth in this list of inflation determinants. Ultimately, inflation is a monetary phenomenon, as suggested by Milton Friedman's famous dictum. However, no contradiction exists, as the expectational Phillips curve is fully consistent with inflation's being determined by monetary forces in the long run. This point, originally made by Friedman himself, has been demonstrated in many textbooks and so I will not discuss it further here. I only note that, as an empirical matter, instabilities in money demand, financial innovation, and many special factors affecting the monetary aggregates make them relatively poor predictors of inflation at medium-term horizons. For this reason, the role of the money supply remains implicit in this discussion...
Posted by DeLong at October 25, 2005 06:43 PM