Edward Harrison — How monetary policy entrenches secular stagnation

I believe that weak nominal growth is a policy choice in large part, rather than a destiny. Here’s why.

"Phillips Curve thinking."

Now what Dudley was implicitly saying is that he wants to tune Fed policy in order to make sure a small cadre of people stays unemployed so that inflation doesn’t take off. That’s because he thinks that, at low levels of unemployment, inflation will rise so much that the Fed will have to react violently. And so it makes sense to prevent that from happening by raising rates sooner rather than later.

That’s a policy choice, folks. Dudley is saying lower inflation is better than higher inflation. And he is also saying in no uncertain terms that he prefers some people be unemployed because their lack of employment will weaken wage-earners’ bargaining power and keep inflation lower. It’s choices like this – when nominal growth is already low – that entrench low growth. And that’s why the yield curve is flattening.

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How monetary policy entrenches secular stagnation
Edward Harrison

See also

Michael Kalecki (Michal Kalecki), Political Aspects of Full Employment, Political Quarterly, 1943