Monday, January 23, 2006

NRO's Tamny reveals his ig'nurnce again...


Tamny apparently thinks there's some kind of profound contradiction between the idea that inflation is caused by money growth and the idea that increases in inflation are caused by economic growth.

If he studied, say, Hall and Papell's undergraduate textbook, Macroeconomics, he'd realize there's no contradiction. I'm giving my students a test on Monday over the very material that Tamny so thoroughly misunderstands.

It's chapters 7 through 9, to be exact.

The big story: If money grows as fast as the real economy's potential, you've got no inflation. If money grows faster than that, you get faster economic growth in the short run, but inflation in the long run.

So you can look at inflation two ways, which are equally valid: Inflation is caused by money growth OR --wait for it, wait for it-- a rise in inflation is caused by having an economy that grows faster than its real potential. The root-causers can go with the first explanation, the proximate-causers with the second. Both are true, according to mainstream New Keynesian models.

That's it! And that's probably what Bernanke roughly believes, since the Hall/Papell model is quite similar to the macro model that Bernanke uses in his freshman econ text.....

I could waste your time on the details--details that I love, and details that my students will be tested on Monday--but that's all I've got time for now....

Tamny: Dumb yesterday, dumb today.

P.S. Careful readers will notice the important role of "real economic potential" in the Fed's decisionmaking--the Fed needs to make sure that money grows only as fast as that potential grows. That's what keeps a Fed chairman up at night--his uncertainty over how to measure that potential. It's a tough job, and one that is literally impossible to do exactly right.

All the more reason for us to wish Ben Bernanke the very best as he undertakes this awesome task.

Posted by Garett Jones at 11/12/2005 10:53:00 PM


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