In my macro critique, I mentioned "meta-narratives" — what did I mean by that? Noah Smith has a nice concise description of one of them today in Bloomberg that helps illustrate what I mean: the wage-price spiral. The narrative of the 1960s and 70s was that the government fiscal and monetary policy started pushing unemployment below the "Non-Accelerating Inflation Rate of Unemployment" (NAIRU), causing inflation to explode. The meta-narrative is the wage-price spiral: unemployment that is "too low" causes wages to rise (because of scarce labor), which causes prices to rise (because of scarce goods for all the employed people to buy). In a sense, the meta-narrative is the mechanism behind specific stories (narratives). But given that these stories are often just-so stories, the "mechanism" behind them (despite often being mathematically precise) is frequently a one-off model that doesn't really deserve the moniker "mechanism". That's why I called it a "meta-narrative" (it's the generalization of a just-so story for a specific macro event).
Now just because I call them meta-narratives doesn't mean they are wrong. Eventually some meta-narratives become a true models. In a sense, the "non-equilibrium shock causality" (i.e macro seismograms) is a meta-narrative I've developed to capture the narrative of women entering the workforce and 70s inflation simultaneously with the lack of inflation today.
Below, I will give a (non-exhaustive) list of meta-narratives and example narratives that are instances of them. I will also list some problems with each of them. This is not to say these problems can't be overcome in some way (and usually are via additional just-so story elements). None have yielded a theory that describes macro observables with any degree of empirical accuracy, so that's a common problem I'll just state here at the top.
Meta-narrative: Wage-price spiral
Narrative: e.g. Exploding inflation in the 70s/"stagflation"
Problems: Doesn't seem to apply to today
Meta-narrative: Human decisions impacting macro observables
Narrative: e.g. Rational expectations and 70s inflation
Problems: Leads to theories that do worse than VARs
Meta-narrative: Monetary policy primacy
Narrative: e.g. Volcker disinflation
Problems: Monetary policy seems ineffective today
Meta-narrative: The Phillips curve
Narrative: e.g. Observed inflation/employment trade-off in the 50s and 60s
Problems: Flattening to the point of non-existence
Meta-narrative: Boom-bust cycles
(von Mises/Minksy investment/credit cycle, Fisher debt-deflation)
Narrative: e.g. The Great Depression, the Great Recession
Problems: Post hoc ergo propter hoc reasoning; recessions aren't cyclical making each investment boom a just-so story of a particular length and critical point ("Minsky moment")
Meta-narrative: Money as a relevant variable
Narrative: e.g. 70s inflation, Friedman-Schwartz account of the Great Depression
Problems: No specific measure of money makes sense of multiple periods of inflation or deflation; extrapolated willy-nilly from hyperinflation episodes to low inflation; lack of inflation with QE
"Meta-narrative: Money as a relevant variable"ReplyDelete
Ah, but what about *expectations*! Gotcha there, didn't I? So much for your meta-meta-narrative! ;^)
(But seriously, the expectations were covered with the entry on human decisions impacting macro variables.)
As for the effectiveness of monetary policy, has it ever shown effectiveness in increasing inflation without existing "animal spirits"? Even if the anti-inflation of the Volcker Fed was not entirely the result of monetary constraint, I think that there is evidence, going back at least into the 17th century, that restricting the money supply has anti-inflationary effects.ReplyDelete
One question I have always had about the wage-price spiral is that, since wages are only part of the cost of goods and services, prices should not increase as much as wages unless something else is going on, but that something else is never mentioned.
The reason I question the narrative about whether attempts to control "money" can cause changes in inflation is the causal analysis using the dynamic equilibrium model. The surge in various monetary measures or interest rates *follow* inflation surges.Delete
But this lag is fairly short (on the order of a year), which requires fairly high frequency data to tease it out. The data from the 17th century (or earlier) is not only uncertain, but at low temporal resolution. It would be impossible to narrow down a lag on the order of a year with any certainty.
We could say that the money-inflation theory is a decent effective theory when precision isn't available or required. But as for "what's really happening", we shouldn't take the mechanism too seriously.
An example from physics: when you don't have or need precision, Newton's gravity law is just fine. But there is no force that acts instantaneously and "what's really happening" is that space-time is curved -- at least as far as we can tell with our current precision.
This is all to say that better measurement is driving theory questions!