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Menzie Chinn: Asymmetries in Aggregate Supply in Two Frameworks: Noted for August 22, 2013

Menzie Chinn: Econbrowser: Asymmetries in Aggregate Supply in Two Frameworks:

[In] the textbook neoclassical synthesis… output then can go above or below potential (unemployment below or above the NAIRU) with symmetric response of price level or inflation. This worldview is not the only one; Paul Krugman has just noted one reason…. Others have also noted related asymmetries, with resulting policy implications--including, Larry Summers and Janet Yellen. In Summers and Delong (1988), the authors provide an interpretation of potential as a level of output that can’t be exceeded… reminiscent of the Friedman “plucking model”…. As of 2012, the output gap using the DeLong-Summers (1988) procedure is quite similar to the implied CBO gap -- 3.6% vs. 4.3% (log terms)…. Yellen and Akerlof (2006)… a decrease in unemployment above NAIRU has a different size impact (in absolute value) than an increase in unemployment below NAIRU… at low inflation rates, the accelerationist hypothesis does not hold…. This means in low-output, low-inflation environments, one should not expect marked increases in inflation for given increases in policy stimulus…. In both cases, conceptions of how aggregate supply works imply activist macroeconomic policy is called for in current conditions, more so than in the case using a conventional, textbook AD-AS framework, even with large negative output gap, although the specific reasons differ.