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Tilting at Windmills: Bernanke and Blanchard's Obsession with the Wage-Price Spiral

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  • Servaas Storm

    (Delft University of Technology)

Abstract

Bernanke and Blanchard (2023) use a simple dynamic New Keynesian model of wage-price determination to explain the sharp acceleration in U.S. inflation during 2021-2023. They claim their model closely tracks the pandemic-era inflation and they confidently conclude that "we don't think that the recent experience justifies throwing out existing models of wage-price dynamics." This paper argues that this confidence is misplaced. The Bernanke and Blanchard is another failed attempt to salvage establishment macroeconomics after the massive onslaught of adverse inflationary circumstances with which it could evidently not contend. It misrepresents American economic reality, hides distributional issues from view, de-politicizes (monetary and fiscal) policy-making, and sets monetary policymakers up to deliver significantly more monetary tightening than can be justified on the basis of more realistic model analyses.

Suggested Citation

  • Servaas Storm, 2024. "Tilting at Windmills: Bernanke and Blanchard's Obsession with the Wage-Price Spiral," Working Papers Series inetwp220, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:inetwp220
    DOI: 10.36687/inetwp220
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    More about this item

    Keywords

    Inflation; science of monetary policy; output gap; unemployment gap; vacancy ratio; inflation expectations; wage-price spiral; non-linear Phillips curve.;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies

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