Saturday, November 28, 2015

Non-deflation non-surprise

Why didn’t the sustained high unemployment after 2008 push us into deflation? There are some popular stories — downward nominal wage rigidity that makes the long-run Phillips curve non-vertical at low inflation rates, “anchored” inflation expectations — and I cite those stories myself. But standard discourse on macroeconomics has not fully taken the non-deflation surprise into account.
That was Paul Krugman in his post from today.

Non-deflation isn't as much of a surprise in the information equilibrium model. Over time the response to inflation from output shocks has become approximately zero. And it's related to the liquidity trap -- the lack of a response to the price level from monetary expansion.

1 comment:

  1. Very cool! So far I am thinking that the lack of deflation and the information transfer relationships regarding the Phillips curve for inflation/unemployment seem to be the biggest empirical successes of Info Econ. Of course the ongoing lack of inflation in the U.S., but other models are also predicting this as well. However, the unresponsiveness of price changes to monetary expansion (in both directions) really does seem to be an advantage of Info Econ- as even Krugman has been puzzling about this for some time now.


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