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It's kind of a stunning set of Fed forecasts, and would have seemed almost unthinkable a decade ago, predicting unemployment below 4% for the next 3 years, but no inflationary pressures expected to emerge, even with interest rates staying below 3%.
It seems that (at least) three big things have changed over the past decade:
1. u* is lower than anyone had ever thought
2. r* is lower than anyone had ever thought
3. The Phillips Curve is flatter than anyone had ever thought.
None of the macroeconomic constants stayed constant
1. u* is lower than anyone had ever thought
2. r* is lower than anyone had ever thought
3. The Phillips Curve is flatter than anyone had ever thought.
None of the macroeconomic constants stayed constant
I guess that there's a message here for macro graduate students: It's a great time to work on big things rather than fiddle about at the edges, because it sure seems that there's a lot we don't know about how the macroeconomy works.
Just derived a macro model which fits the data on inflation, unemployment, output, interest rates and 22 other variables perfectly. All it took was a bunch of unobservable variables--you know, the usual r*, u*, p*--to which I added a*, b*, c*, d* and the rest of the star alphabet
