"They will say this was a supply-side recession and it was bound to recover quickly on its own."
A negative _demand_ shock like 2008 ought to be easier to fix with monetary policy than a supply ide shock. The "Great Recession" was just incredibly bad monetary policy, refusal even to return the price level to a 2% trajectory when even that might not have been enough.
"The economy itself can be permanently on a lower… potential GDP growth path. To get it back to where it should be, you have to run the economy hot,"
But you should always run the economy "hot." Sometimes that means shooting for temporarily over-target inflation. It's nothing the Fed should apologize for.
Unrelated to the episode, but there's an ECB paper being discussed next week that argues targeting discretionary spending is superior to headline inflation targeting, would be worth inviting the authors!
It should not throw out FAIT at all. How do we _know_ that just enough over target inflation to catch the price level back up to the pre-shock path is enough to allow all the relative prices involving sticky nominal prices to adjust? I'd guess that pure catch-up inflation IS enough for demand shocks, but not for supply shocks.
"They will say this was a supply-side recession and it was bound to recover quickly on its own."
A negative _demand_ shock like 2008 ought to be easier to fix with monetary policy than a supply ide shock. The "Great Recession" was just incredibly bad monetary policy, refusal even to return the price level to a 2% trajectory when even that might not have been enough.
This post provides a visual "explanation".
https://marcusnunes.substack.com/p/the-simple-and-true-story-of-the
"The economy itself can be permanently on a lower… potential GDP growth path. To get it back to where it should be, you have to run the economy hot,"
But you should always run the economy "hot." Sometimes that means shooting for temporarily over-target inflation. It's nothing the Fed should apologize for.
Unrelated to the episode, but there's an ECB paper being discussed next week that argues targeting discretionary spending is superior to headline inflation targeting, would be worth inviting the authors!
Paper
https://www.ecb.europa.eu/pub/pdf/sintra/ecb.forumcentbankpub2025_Surico_paper.en.pdf
Conference
https://www.ecb.europa.eu/press/conferences/html/20250630_ecb_forum_on_central_banking.en.html
Article
https://www.reuters.com/world/europe/ecb-should-change-inflation-target-researchers-tell-policymakers-2025-06-27/
It's hard enough to determine wether any humans can even be trusted with large sums of money.
However, seeing that banks are very useful in many scenarios. To make a bank fail have less recoil is a human advancement into the future.
It should not throw out FAIT at all. How do we _know_ that just enough over target inflation to catch the price level back up to the pre-shock path is enough to allow all the relative prices involving sticky nominal prices to adjust? I'd guess that pure catch-up inflation IS enough for demand shocks, but not for supply shocks.