"(This claim [bad monetary policy] does not apply to inflation created by supply shock problems.)"
I would say it does in this case too, if we mean _greater than optimal_ inflation.
A negative supply shock -- a sudden large increase in tariffs in a particular set of goods, for example -- if this is not to cause unemployment of some resources, has to raise the relative prices of the shocked goods (and their inputs?) and reduce the relative price of other goods and wages. If some goods or wages can adjust downward only very slowly, the adjustment in relative prices can occur only if the average of all prices rises. A central bank that has as it goal a real income maximizing inflation rate will engineer enough inflation to allow those relative price changes to occur. If, on the other hand, it creates more than unemployment minimizing inflation, THAT would be bad monetary policy causing greater than optimal inflation.
"Bordo, Bush and Thomas (BBT, p. 18) correctly argue that supply shocks alone cannot explain British inflation."
They correctly make the distinction of optimal and supra-optimal inflation. The one complaint I have with the quoted statement, however, is the implication that wages are the only price that can be downwardly inflexible.
a) Wages are highly heterogeneous across sectors and
b) Real estate contracts can be highly inflexible downwardly too.
This is a problem of implicitly thinking in a one good, one input, one relative price model.
"don’t plan to suggest that any one of these is always correct, but in my own field of monetary economics I’m interested in causality arguments with useful policy implications."
So are we all, I'd hope. What are the policy implications for the UK today?
Harder to say, I'd guess. The world is messy (data-wise, expectations-wise) and politics always tricky. Short-term pain for long-term gain may not win the next election.
It seems like the cost plus view of inflation remains engrained in UK official policy making. Boris Johnson was recently quoted saying that the recent so-called Boriswave of permissive immigration was forced on him by the UK treasury as a way to reduce inflation after Covid. Of course this worked to restrain wage inflation (not overall), but at probably much higher political cost than simply reducing monetary expansion.
"Was any attempt to solve inflationary problems in the UK through monetary policy alone doomed to be unsuccessful because it this approach was technically infeasible, or because the UK government had a flawed model of monetary policy and wasn’t willing to use it appropriately?"
There are two other alternatives.
1) The model was not flawed but the implied policy was deemed not politically convenient.
2) The required interest rate to hold to an inflation target woud have been so high as to itself reduce growth by more than the excess inflation would. That is the central bank faced "fiscal dominance."
I addressed fiscal dominance in the post. In fact, a tighter monetary policy would have led to faster economic growth in the medium term, as high inflation is a significant tax on investment. In addition, a tighter monetary policy would have led to lower interest rates through the Fisher effect.
"For every year where oil spikes pushed inflation higher ..."
Oil spikes without monetary accommodation to facilitate relative price changes do not push inflation higher in any year.
Using Aristotelian categories of cause can help. The supply shock (the oil price spike) is the "material" cause, and monetary policy is the "efficient" cause.
Economics is NOT "a fictious (sic) social science" but rather the actual net trading/investment activity of the entire population. A "permissionless" world is unmitigated chaos. "Capitalism" or any other such financial systemic descriptor DEPENDS on a regulated environment of some sort.
I guess I agree with this post.
"(This claim [bad monetary policy] does not apply to inflation created by supply shock problems.)"
I would say it does in this case too, if we mean _greater than optimal_ inflation.
A negative supply shock -- a sudden large increase in tariffs in a particular set of goods, for example -- if this is not to cause unemployment of some resources, has to raise the relative prices of the shocked goods (and their inputs?) and reduce the relative price of other goods and wages. If some goods or wages can adjust downward only very slowly, the adjustment in relative prices can occur only if the average of all prices rises. A central bank that has as it goal a real income maximizing inflation rate will engineer enough inflation to allow those relative price changes to occur. If, on the other hand, it creates more than unemployment minimizing inflation, THAT would be bad monetary policy causing greater than optimal inflation.
"Bordo, Bush and Thomas (BBT, p. 18) correctly argue that supply shocks alone cannot explain British inflation."
They correctly make the distinction of optimal and supra-optimal inflation. The one complaint I have with the quoted statement, however, is the implication that wages are the only price that can be downwardly inflexible.
a) Wages are highly heterogeneous across sectors and
b) Real estate contracts can be highly inflexible downwardly too.
This is a problem of implicitly thinking in a one good, one input, one relative price model.
"don’t plan to suggest that any one of these is always correct, but in my own field of monetary economics I’m interested in causality arguments with useful policy implications."
So are we all, I'd hope. What are the policy implications for the UK today?
Harder to say, I'd guess. The world is messy (data-wise, expectations-wise) and politics always tricky. Short-term pain for long-term gain may not win the next election.
It seems like the cost plus view of inflation remains engrained in UK official policy making. Boris Johnson was recently quoted saying that the recent so-called Boriswave of permissive immigration was forced on him by the UK treasury as a way to reduce inflation after Covid. Of course this worked to restrain wage inflation (not overall), but at probably much higher political cost than simply reducing monetary expansion.
Yes, monetary policy is always the most efficient way of maintaining appropriate growth in aggregate demand (NGDP.)
"Was any attempt to solve inflationary problems in the UK through monetary policy alone doomed to be unsuccessful because it this approach was technically infeasible, or because the UK government had a flawed model of monetary policy and wasn’t willing to use it appropriately?"
There are two other alternatives.
1) The model was not flawed but the implied policy was deemed not politically convenient.
2) The required interest rate to hold to an inflation target woud have been so high as to itself reduce growth by more than the excess inflation would. That is the central bank faced "fiscal dominance."
I addressed fiscal dominance in the post. In fact, a tighter monetary policy would have led to faster economic growth in the medium term, as high inflation is a significant tax on investment. In addition, a tighter monetary policy would have led to lower interest rates through the Fisher effect.
"For every year where oil spikes pushed inflation higher ..."
Oil spikes without monetary accommodation to facilitate relative price changes do not push inflation higher in any year.
Using Aristotelian categories of cause can help. The supply shock (the oil price spike) is the "material" cause, and monetary policy is the "efficient" cause.
Economics is NOT "a fictious (sic) social science" but rather the actual net trading/investment activity of the entire population. A "permissionless" world is unmitigated chaos. "Capitalism" or any other such financial systemic descriptor DEPENDS on a regulated environment of some sort.