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Junio's avatar

"The reader may also notice that I did not say anything about the tariffs being “inflationary,” although that is often mentioned as a downside of tariff increases. In part this is on the general principle that changes in fiscal policy do not affect inflation; only the Fed controls inflation and deflation. For the same reason, tariff changes would have no effect on total employment, also controlled by the Fed."

On the general principle that changes in fiscal policy don't affect inflation or no effect on total employment, could the argument about tariffs being inflationary or having effects on employment still be valid in the sense that 1) the Federal Reserve's policy could be off 2) that it still has nominal distortions, despite no real effect? You know more than me on this so I'm just curious.

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Thomas L. Hutcheson's avatar

This may get us into whihc one of Aristotle's 4 senses of "cause" we are talking about. :) [Not really. I'm talking abut the "efficient" cause.]

If fiscal policy creates a "shock" that requires large enough changes in resource allocation and large enough changes in relative prices to permit that reallocation, then a Fed that is running a Flexible Average Inflating Target regime may decide to create some additional inflation (above target if they were on target before) to facilitate the relative price changes and resource re-allocation without causing unemployment. [Of course it could get the amount of inflation wrong, too much or too little with unemployment]

Now, in that case, who caused the inflation? The Fed or the fiscal policy? Since the Fed could have made a different decision about how to react the the fiscal shock (how "flexible" does it decide to be?), I think that in the interest of analytic clarity we should say the Fed caused the inflation. To do otherwise runs the risk of making a particular Fed decision implicit in the analysis.

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Junio's avatar

Thank you. This makes sense.

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Thomas L. Hutcheson's avatar

Thanks. That is helpful. I'm a lot more certain about the validity of my opinions (for good or ill) than my way of expressing them.

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