September 23, 2019
Summary
Main Results
1970s Stagflation
1970s stagflation: Theory ahead of Facts?
Previous excerpt comes from Blanchard’s Macroeconomics textbook.
- Alternative explanation: the exchange rate regime changed, so that all of a sudden: \[\text{Real Exchange Rate growth} \neq \text{Inflation}.\]
This explanation is more parsimonious, as Friedman and Phelps do not explain why expectations changed then (why people suddenly started having rational expectations). On the contrary, it is a fact that Nixon ended the Bretton Woods system in 1971.
This is important more generally for Macroeconomics:
The triumph of Rational Expectations Macroeconomics largely came from that one example.
Stagflation was viewed a major blow to Keynesianism. It only was to sticky-price (Phillips curve) based Keynesianism. Nothing changed in the 1970s.
Discontinuity-Based Identification
Discontinuity-Based Identification
According to Nakamura and Steinsson (2018), this is a very important source of identification in Macroeconomics.
These two events are very important for Keynesian Economics, as they are taken from “Focus” boxes in a leading mainstream undergraduate textbook. (Blanchard, Macroeconomics)
These
1933-1939 Missing Deflation
Within Countries
Two main examples
1970s Stagflation: typical rationale is that there was a change in inflation expectations, as Phelps and Friedman had predicted.
Alternative explanation: the U.S. moved from a fixed to a flexible exchange rate regime.
33-39 Missing Deflation. Usually presented as a problematic failure of the Phillips curve. Why did inflation rise in 1933-1939 despite (still) massive unemployment?
Alternative explanation: Roosevelt devalued the dollar, providing the real devaluation of the dollar which deflation was previously achieving.
1970s Stagflation (Blanchard’s textbook)
1970s Stagflation (Blanchard’s textbook)
Another example: 33-39 Missing Deflation
Another example: 33-39 Missing Deflation
Alternative to sticky prices? (Geerolf (2019))
Production function
Neoclassical or Secular Stagnation?
Conclusions
Conclusions
Robust relationship is between real exchange rates and unemployment.
There never was a Phillips curve.
Geerolf, François. 2019. “A Theory of Demand Side Secular Stagnation.” UCLA Working Paper. https://fgeerolf.com/hansen.pdf.
Nakamura, Emi, and Jón Steinsson. 2018. “Identification in Macroeconomics.” Journal of Economic Perspectives 32 (3): 59–86. https://doi.org/10.1257/jep.32.3.59.