A new research paper tries to explain why the economics profession got it wrong on inflation.
Most of the economics profession, from the Federal Reserve on down, got it wrong on inflation. So the question of why they were wrong is an important one, not just for finger-pointing but for the future of price developments.
The authors, Laurence Ball of Johns Hopkins University, and Daniel Leigh and Prachi Mishra of the International Monetary Fund, say part of the forecasting error came from big shocks like the disruption of supply chains and Russia’s invasion of Ukraine. Another mistake came from underestimating the pass-through effects from higher overall inflation to core. But those weren’t the only issues.
The researchers admit they don’t know why the traditional relationship between the unemployment rate and the vacancy rate, called the Beveridge Curve, changed. The $1.9 trillion American Recovery Act, or what’s known as the Biden stimulus, started to heat up inflation in 2022, they say. Their model suggests inflation is between 25% and 40% higher than it would’ve been in the absence of the stimulus. And that, they say, is just the “lower bound” of the impact — they note Summers ascribes some of the supply-chain problems being a function of the ARA as well.
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