I think Mark Thoma nails this . What he describes is exactly the way I think about the issue but have been unable to articulate. To answer the question in the title of this post, it's useful to think of an island with only two goods. One of the goods is non-renewable, but highly desirable. The other good is less preferred, but it is renewable (thinking of renewable and non-renewable energy resources, for example). The key is to distinguish between changes in prices that reflect changes in the relative scarcity of the two goods, and changes driven by increases in the money supply. Over time, as the stock of the more desired good falls due to consumption, the price of this good will rise relative to the renewable good. Consumers will be hit by increases in the cost of living -- the same basket of the two goods purchased last year now costs more. But is this the kind of increase in prices the Fed should respond to? No, the price increase -- and the increase in the c
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ReplyDeletecongrats from down the road in CH!
ReplyDeleteThanks all! I've been too busy with end-of-semester stuff to enjoy it much. But still, very happy.
ReplyDeleteCongratulations -- You deserve it!
ReplyDeleteJeff Reimer