Unfinished Business in the Macroeconomics of Low Inflation: A Tribute to George and Bill by Bill and George

By Akerlof, George A.; Dickens, William T. | Brookings Papers on Economic Activity, Fall 2007 | Go to article overview

Unfinished Business in the Macroeconomics of Low Inflation: A Tribute to George and Bill by Bill and George


Akerlof, George A., Dickens, William T., Brookings Papers on Economic Activity


THE RETIREMENT OF GEORGE Perry and William Brainard as editors of the Brookings Papers gives us an opportunity to say publicly what we have often said privately: the Brookings Papers is an important national institution. It is important because it has set the right tone for U.S. macro-economic policy. George and Bill are both Keynesians, not just in the narrow tradition of IS-LM models with Phillips curves, but also in their broader methodological approach to macroeconomics. The Brookings Papers has always reflected their view that macroeconomics should be a pragmatic and judicious mixture of theory and common sense, informed by statistical analysis. That of course reflects the methodology of Keynes, throughout his life and especially in The General Theory. We think that U.S. macroeconomic policy has benefited enormously from such a balanced pragmatic-empirical approach.

Anyone who doubts the benefits of such an approach to macroeconomics needs only look to the north--to Canada--where doctrinaire use of an extreme form of natural rate theory in the 1990s led policymakers to push inflation too low, resulting in an unusually wide unemployment gap relative to the United States. This is just one example where a more empirical, more nuanced macroeconomics--such as presented for the last thirty years in the Brookings Papers--has implications for national welfare. Macroeconomic policy, as no one appreciated better than Keynes, often even makes the difference between prosperity and depression.

It will be a hard task for the new editors to take the place of George and Bill, and we wish them luck. Neither this Bill nor this George has ever envied George and Bill their difficult job. They have edited the Brookings Papers the hard way. The easy way is to trawl the conferences and the economics department hallways for the best of what already exists. Instead, for the most part, George and Bill recruited people to push forward their pragmatic agenda for macroeconomic research. The influence of George and Bill, even in the late stages of producing these papers, is clear to all members of the Brookings Panel. We have continued to be amazed at how George and Bill could take the meeting drafts, which were not always in the best of shape, and quickly tuna them into interesting, readable gems. In short, they have done the impossible: admittedly with some very good help from their authors, they have produced something like eight to twelve significant and relevant new papers on macroeconomics per year, year after year.

Some Background on This Paper

This volume in honor of George Perry and William Brainard is an opportunity to reflect back on the two Brookings Papers we wrote with Perry (with comments and occasional help from Brainard) on the macroeconomics of low inflation. (1) Although they took somewhat different approaches, these two papers had similar policy implications. Both found a significant cost of permanently low inflation in terms of permanently high unemployment.

Each paper examined the effects of a different type of money illusion. The earlier paper, "The Macroeconomics of Low Inflation," examined the consequences of downward nominal wage rigidity, or resistance to nominal wage cuts. "Near-Rational Wage and Price Setting" examined the consequences of people thinking in nominal rather than in real terms when inflation is very low. When this happens, a trade-off will emerge between inflation and unemployment--not just in the short run, but also in the long run when actual inflation and expected inflation are equal.

Although the existence of such a trade-off was previously well known, its magnitude was not. Both papers found surprisingly large long-run increases in unemployment from permanent reductions in inflation to zero. For example, in the benchmark simulation in the first paper, with limited nominal wage cuts for continuing workers, we found that a permanent reduction in annual inflation from 2 percent to zero would increase unemployment by 1. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Unfinished Business in the Macroeconomics of Low Inflation: A Tribute to George and Bill by Bill and George
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.