Standard Econ Model Bridges the “Unfortunate Events” and “Original Sin” Explanations for Inflation

Jai KediaTwo weeks ago, some of the biggest names in academia and monetary policygathered at Brookings to discuss what factors had contributed to the recentspike in inflation. To that end, Ben Bernanke and Olivier Blancharddesigned a  model and found that the primary causes for post ‐​Covid inflation were supply shortages, food price shocks, and energy price shocks – the “series of unfortunate events” explanation. However, their paper raises a larger issue with academic approaches to addressing real‐​world economic questions.The model used in the paper is niche, designed specifically for their analysis. Consequently, it is hard to analyze how much of the results are driven by real effects or by an unusual choice of model. One particularly strange choice is that the model does not include a  direct avenue for policy, meaning that the other channels in the paper may be spuriously picking up monetary or fiscal policy effects (and even demand factors). The result is that it is impossible to determine where inflationary effects are truly coming from.In a  discussion of the paper, Jason Furman pointed out as much, showing that most of the shocks in the paper are endogenously determined. Using an empirical and a  narrative approach, Furman attributes the sharp increase in core PCE inflation to reckless policymaking – the “original sin” explanation. The two analyses offer contrasting results but neither approach uses a unified theory that allows for the simu...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs