Well, not quite, but it was worth it for the headline. In this post, John Taylor cites recent work by Erceg and Levin at the Board of Governors, pointing out that headine unemployment rates are a bad indicator of true labour market slack in the US, because the contraction has discouraged a large share of the labour force from even trying to look for work. So true unemployment (or under-employment) is much worse than headline unemployment. [One reason why it’s helpful to use the property of sticky price models, if you believe in them, that the inflation rate can also tell you about the amount of slack in the economy]. John Taylor does not, however, draw the conclusion that, after all, the loose monetary policy he has been criticising is warranted. Why not, I cannot fathom. The output gap is the unobserveable variable he told central banks to feed into their interest rate rules in 1993. Surely any sensible model of that unobserveable would conclude that the output gap was greater, having formally digested the result that participation was highly cyclical? In which case policy should be looser than previously thought? (If not, what procedure should we be using to estimate the output gap?) Instead JT alludes to why activity is weaker. I am putting words in his mouth here, but reconstructing from other things he has written, he thinks that activity is weak because of corrosive fiscal policy wars, caused ultimately by the Democrats breaking with what he (incorrectly in my view) sees as a tradition of not doing fiscal stimulus. And to be corrected by tighter fiscal policy. Something I noted before to be counter-intuitive.
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I think you’re drawing conclusion on the output gap too fast here. Flexible price,real frictions, models of unemployment would simply draw the conclusion that unemployment is more cyclical, without implying it’s because of the output gap, defined as the component of output movements that can be dealt with by standard monetary policy (e.g pick any real business cycle model with unemployment- directed search, bargaining , whatever ).
Great observation. With flexible prices, changing participation could still happen, yet this would not signal the need for a policy change. However, with sticky prices and or wages, I think my point would still go through.