Paul Krugman

Paul Krugman @paulkrugman

So I just don't see the case for a period of "excess" unemployment. That still leaves the question of how much more, if any, Fed tightening is required to cool the economy to a sustainable temperature 8/ — PolitiTweet.org

Paul Krugman @paulkrugman

Longer perspective, to show how different things are this time 7/ https://t.co/pyOsWQCLsE — PolitiTweet.org

Paul Krugman @paulkrugman

Does u need to go well above u*, Volcker style? Some people still saying that, still talking about "sacrifice ratios", but I don't get it. The Volcker slump was an effort to squeeze out high inflation expectations. But expected inflation isn't high now 6/ https://t.co/nN9Kdeo5Mj — PolitiTweet.org

Paul Krugman @paulkrugman

Pre pandemic, u* seemed to be around 3.5, which is where we are now. However, high vacancies and high core inflation seemed to suggest a big rise. However however, vacancies coming down rapidly and wage growth not that high. 5/ https://t.co/cKIA55rDNB — PolitiTweet.org

Paul Krugman @paulkrugman

This leaves three questions: 1. What is u*? 2. Do we need to go above it? 3. What Fed policy is needed to get where we need to go? 4/ — PolitiTweet.org

Paul Krugman @paulkrugman

But if you accept that model, there is at any given time an unemployment rate — u* — at which actual inflation will more or less match expected inflation. (Don't like calling it a NAIRU — with anchored expectations, which we seem to have, u<u* doesn't cause accelerating inf) 3/ — PolitiTweet.org

Paul Krugman @paulkrugman

This model could be wrong! Hoping that @Claudia_Sahm will explain why she wants to ban the Phillips curve (and how to replace it) when we have a CUNY event on the 19th 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

A thread on Fed policy, explaining — partly to myself — where I'm coming from. The first thing to say is that in a *qualitative* sense my views are depressingly mainstream. My working model is that inflation, other things equal, reflects unemployment and expected inflation 1/ — PolitiTweet.org

Paul Krugman @paulkrugman

Good news from the BLS https://t.co/cKIA55rDNB — PolitiTweet.org

Paul Krugman @paulkrugman

Worrying that the Fed is behind the curve, focused on inflation tough talk when it has already done a huge amount to reduce demand https://t.co/rntKii5DtG — PolitiTweet.org

Paul Krugman @paulkrugman

The point, then, is that looking at fairly robust job growth now needn't mean that the Fed hasn't done enough; lots of contraction from 2022's policy moves still to be felt 11/ — PolitiTweet.org

Paul Krugman @paulkrugman

That's because it takes time to switch to new suppliers and in general reconfigure global production. So there's a coming hit to US net exports, but it hasn't happened yet 10/ — PolitiTweet.org

Paul Krugman @paulkrugman

The other major channel for monetary policy these days is the dollar: a strong dollar eventually reduces exports and increases imports. But here I'm on my home turf: we've always known that these adjustments take multiple quarters 9/ — PolitiTweet.org

Paul Krugman @paulkrugman

And spillovers to the rest of the economy from falling construction will take even longer 8/ — PolitiTweet.org

Paul Krugman @paulkrugman

Permits are already down a lot, with more probably coming. But the road from permits => housing starts => max construction employment takes a long time, so construction employment hasn't fallen yet. 7/ — PolitiTweet.org

Paul Krugman @paulkrugman

You can see the lags if you look at housing, which is one of the two main places where Fed policy gains traction. 6/ https://t.co/EkUgEcBzyu — PolitiTweet.org

Paul Krugman @paulkrugman

Which is more or less what I've been saying 5/ https://t.co/FvX61a1jka — PolitiTweet.org

Paul Krugman @paulkrugman

So what about those old-style monetary shocks. Classic estimates by Romer and Romer, using narrative info to identify Fed shocks, found long lags in impact 4/ https://t.co/7ISrvm8cGo — PolitiTweet.org

Paul Krugman @paulkrugman

Key takeaway 3/ https://t.co/9Dz57mcyW6 — PolitiTweet.org

Paul Krugman @paulkrugman

A useful set of slides by Ramey more or less confirms one point in my earlier thread: it's very hard to get useful information from data for the past few decades, because we basically haven't been experiencing old-style monetary shocks (until now) 2/ https://t.co/Lr8tgPEWKC — PolitiTweet.org

Paul Krugman @paulkrugman

Gah. So I've just spent hours going down the rabbit hole on attempts to assess the lags in effects of monetary policy 1/ https://t.co/QgxZSiqhnz — PolitiTweet.org

Paul Krugman @paulkrugman

That was "the lag between the fall". Sigh. Where's my edit button 6/ — PolitiTweet.org

Paul Krugman @paulkrugman

So right now we're probably just beginning to feel the outer edge of the storm. Lots of downdraft from monetary tightening that has already taken place coming in the months ahead. 5/ — PolitiTweet.org

Paul Krugman @paulkrugman

The wage between the big fall in rates in summer 1982 and Morning in America was shorter, but still ~6 months 4/ — PolitiTweet.org

Paul Krugman @paulkrugman

But look at the 1981-2 recession, which was a relatively pure case of the Fed hitting the economy upside the head. Long-term interest rates peaked in Sept. 1981, unemployment more than a year later 3/ https://t.co/8V7KQIerDK — PolitiTweet.org

Paul Krugman @paulkrugman

Now, finding relevant history is hard. Since 1990, all US recessions have been the result of private-sector overreach (dotcom bubble, housing bubble) rather than Fed tightening, so they don't tell us much 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

A key question is how much of the effect of Fed tightening on the real economy is still in the pipeline. I would say almost all of it, both on general principles — changing real investment plans in the face of financial conditions takes time — and history 1/ — PolitiTweet.org

Paul Krugman @paulkrugman

GS says that almost half the excess demand for labor has already been eliminated — and so far we've barely begun to see the effects of tight money. The Fed may well have overshot https://t.co/2m8kbimuOs — PolitiTweet.org

Paul Krugman @paulkrugman

Paranoia strikes deep. This is the governor of one of America's biggest states. Basically the whole GOP sees conspiracies everywhere. — PolitiTweet.org

Paul Krugman @paulkrugman

Yes, the Fed was behind the curve on rising inflation. But I worry that we may be enacting the old joke about the driver who runs over a pedestrian, then tries to fix it by backing up — and runs over the guy a second time 5/ — PolitiTweet.org