Persistent inflation was easy to predict from a basic IS-MP analysis with wealth effects, fiscal policy, and multipliers. The driving force is demand >> supply and this will remain so unless house and stock prices come down or supply recovers a lot 1/4
The question is not why we had inflation but whether it can be optimal monetary policy to allow for some inflation in these circumstances. In fact, there is one argument for having some overheating and inflation

Since spending/aggregate demand has inertia, current monetary stimulus raises spending next year. If one thinks supply bottlenecks are large and will resolve next year (and that’s a big if), then some overheating now can be useful as it can speed up the recovery going forward 3/4
While this can qualitatively explain some overheating and inflation, my sense is the Fed has overdone it. House and stock valuations are substantially elevated even compared to before Covid. They need to come down somewhat

I continue to think the Fed should taper much faster 4/4

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More from @alpsimsek_econ

1 Feb
The GameStop saga has many interesting dimensions. But there is an aspect that I don't think is sufficiently appreciated. In general, retail speculation hurts the retail traders the most. Platforms like Robinhood made the problem worse by making speculation cheaper and easier 1/n
Empirical evidence shows that speculation by individual investors substantially lowers their returns, due to excessive risks, transaction costs, and a poor ability to pick stocks and to time the market. See the excellent review paper by Barber&Odean 2/n…
While retail investors tend to lose, institutional investors on average make money—both because they collect the transaction costs, and because they have stock picking and market timing ability and take the other side of retail trades. Imagine gambling: The house always wins 3/n
Read 8 tweets
8 May 20
The Covid-19 shock almost caused a financial crisis. Central banks reacted aggressively to stop the free fall. My research with Ricardo Caballero sheds light on these events. Long thread! 1/N #EconTwitter


The economy produces goods and services that must be absorbed by spending by households, firms, governments... Much of modern macro is concerned with equilibrium in goods markets 2/N
Economic activity also involves risks that need to be absorbed by investors---banks, institutions, households... Much of modern finance/asset pricing is concerned with equilibrium in risk markets 3/N
Read 36 tweets

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