The Art of Paradigm Maintenance: How the 'Science of Monetary Policy' tries to deal with the inflation of 2021-2023

Servaas Storm (s.t.h.storm@tudelft.nl)
Additional contact information
Servaas Storm: Delft University of Technology

No inetwp214, Working Papers Series from Institute for New Economic Thinking

Abstract: The macroeconomic models used by major institutions including the Federal Reserve and the International Monetary Fund (IMF) failed to predict the inflation surge during 2021-2023. The output gap, the unemployment gap, the New Keynesian Phillips curve and inflation expectations did not give timely and relevant signals. The re-emergence of inflation thus threw the 'science of monetary policy' off the rails. Faced with the choice between changing their paradigm and proving that there is no need to do so, the 'scientists of monetary policy' got busy on the proof. As a result, a number of ad-hoc epicycles have been added to the New Keynesian analytical core, with the help of which one can claim to be able to explain the sudden acceleration of inflation post-factum. This paper critically reviews the theoretical and empirical merits of three recent tweaks to the New Keynesian core: using the vacancy ratio as the appropriate measure of real economic activity; hammering on the considerable risk of an imminent wage-price spiral; and the resurrection of the non-linear Phillips curve. The paper concludes by drawing out sobering lessons concerning the art of paradigm maintenance as practiced by the 'scientists of monetary policy'.

Keywords: Inflation; science of monetary policy; output gap; unemployment gap; vacancy ratio; inflation expectations; wage-price spiral; non-linear Phillips curve. (search for similar items in EconPapers)
JEL-codes: E0 E5 E6 E62 I12 J08 O23 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2023-10-04
New Economics Papers: this item is included in nep-cba and nep-mon
References: Add references at CitEc
Citations:

Published

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4645936 First version, 2023 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp214

DOI: 10.36687/inetwp214

Access Statistics for this paper

More papers in Working Papers Series from Institute for New Economic Thinking Contact information at EDIRC.
Bibliographic data for series maintained by Pia Malaney (pmalaney@ineteconomics.org).