Much Is Still Unknown About How the Macroeconomy Works

(p. B5) It has long been a central tenet of mainstream economic theory that public fears of inflation tend to be self-fulfilling.

Now though, a cheeky and even gleeful takedown of this idea has emerged from an unlikely source, a senior adviser at the Federal Reserve named Jeremy B. Rudd. His 27-page paper, published as part of the Fed’s Finance and Economics Discussion Series, has become what passes for a viral sensation among economists.

The paper disputes the idea that people’s expectations for future inflation matter much for the level of inflation experienced today.

. . .

“Macroeconomics behaves like we’re doing physics after the quantum revolution, that we really understand at a fundamental level the forces around us,” said Adam Posen, president of the Peterson Institute for International Economics, in an interview. “We’re really at the level of Galileo and Copernicus,” just figuring out the basics of how the universe works.

“It requires more humility and acceptance that not everything fits into one model yet,” he said.

Or put less politely, as Mr. Rudd writes in the first sentence of his paper, “Mainstream economics is replete with ideas that ‘everyone knows’ to be true, but that are actually arrant nonsense.”

For the full commentary, see:

Neil Irwin. “THE UPSHOT; How Does the Economy Really Work? Your Guess May Be as Good as Policy Experts’.” The New York Times (Tuesday, October 5, 2021): B5.

(Note: ellipsis added.)

(Note: the online version of the commentary was updated October 15 [sic], 2021, and has the title “THE UPSHOT; Nobody Really Knows How the Economy Works. A Fed Paper Is the Latest Sign.”)

The paper by Rudd, mentioned above, is:

Rudd, Jeremy B. “Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?),” Finance and Economics Discussion Series 2021-062. Washington: Board of Governors of the Federal Reserve System, (Sept. 23, 2021).

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