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Thomas L. Hutcheson's avatar

Nice explanation, but in a way irrelevant.

[Pedantry warning!!]

Presumably what each central bank is doing in response to supply shocks (or even demand shocks if they are sector specific) is to allow the average price level to rise by enough (and no more) so that relative prices (some of which adjust more slowly than others and some scarcely fall at all in absolute terms) can smoothly adjust to keep resources fully and efficiently employed. This omniscient central bank understand the quirks of the price indices it has to work with and has set its flexible average inflation target accordingly AND perfectly make the appropriate allowances for any idiosyncratic shocks that come along in allowing the needed flexibility.

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Zardoz's avatar

Thanks for the pointer to that Firebug podcast. There's a few interesting episodes there.

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