December 10, 2018

Are there “variability trade-offs”?

John Taylor put it succinctly: Several years ago, in an effort to more clearly delineate the short-run versus the long-run trade-off, I estimated a different type of trade-off between inflation and output (Taylor 1979). Rather than a long-run trade-off between the levels of inflation and output, I defined and estimated a long-run trade-off between the variability of inflation and of output. Because of this trade-off, efforts to keep the inflation rate too stable would result in larger fluctuations in real GDP and unemployment. Conversely, efforts to smooth out the business cycle too much would result in a more volatile inflation… Read More