Tilting at Windmills: Bernanke and Blanchard's Obsession with the Wage-Price Spiral

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

No inetwp220, Working Papers Series from Institute for New Economic Thinking

Abstract: Bernanke and Blanchard (2023) use a simple dynamic New Keynesian model of wage-price determination to explain the sharp acceleration in U.S. inflation during 2021-2023. They claim their model closely tracks the pandemic-era inflation and they confidently conclude that "we don't think that the recent experience justifies throwing out existing models of wage-price dynamics." This paper argues that this confidence is misplaced. The Bernanke and Blanchard is another failed attempt to salvage establishment macroeconomics after the massive onslaught of adverse inflationary circumstances with which it could evidently not contend. It misrepresents American economic reality, hides distributional issues from view, de-politicizes (monetary and fiscal) policy-making, and sets monetary policymakers up to deliver significantly more monetary tightening than can be justified on the basis of more realistic model analyses.

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: 32 pages
Date: 2024-03-29
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mon and nep-pke
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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp220

DOI: 10.36687/inetwp220

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