A Sentence to Ponder
By Arnold Kling
Gap-based theories of inflation were badly discredited in the 1970s.
To the Krugmans and DeLongs of the world, it is intuitively obvious that with unemployment approaching 10 percent we cannot possibly have inflation, so monetary and fiscal policy should be set on full speed ahead. However, if a post-bubble economy were to behave more like a supply shock than a demand shock, we could be in for a rude awakening. The monetary and fiscal expansion may have little or no effect on unemployment, and after a bit of a lag we could see inflation come back with a vengeance. That is why I am not convinced that Sumnerian monetary expansion last year would have worked any wonders.