Chapter 29 — Key Takeaways
The quantity theory (MV = PY)
Long-run: money growth → inflation. Short-run: velocity and output also vary, so the relationship is not one-for-one. The quantity theory is a good long-run framework but needs supplementing for short-run analysis.
Demand-pull vs. cost-push
- Demand-pull: too much spending relative to capacity (fiscal stimulus, consumer boom)
- Cost-push: rising input costs (oil shocks, supply-chain disruptions, wage growth exceeding productivity)
- Most episodes involve both. The 2021–23 surge was both simultaneously.
Inflation expectations
The single most important variable. Anchored expectations → short-run shocks don't become permanent. Unanchored expectations → inflation becomes self-reinforcing. Central bank credibility is what anchors expectations.
The Phillips curve
- Short run: trade-off between inflation and unemployment (reduce unemployment → inflation rises)
- Long run: no trade-off (the curve is vertical at NAIRU). Trying to keep unemployment permanently below NAIRU requires ever-accelerating inflation.
- The 1970s stagflation proved that the long-run trade-off was an illusion.
The central bank's dilemma
Maximum employment and stable prices can conflict. Reducing inflation requires accepting some unemployment (or hoping for supply-side help). The 2022–23 soft landing was possible because expectations were anchored and supply cooperated.
PART VI COMPLETE.