For years, I’ve been trying to convince the profession that inflation is not the right variable, it’s NGDP growth that matters. One example I frequently cite is the prediction of NK models that inflation caused by negative supply shocks can be expansionary at the zero lower bound. The failure of the NIRA during the 1930s suggests that this is not true, and now a new NBER study by Julio Garin, Robert Lester and Eric Sims reaches the same conclusion:
The basic New Keynesian model predicts that positive supply shocks are less expansionary at the zero lower bound (ZLB) compared to periods of active monetary policy. We test this prediction empirically using Fernald’s (2014) utilization-adjusted total factor productivity series, which we take as a measure of exogenous productivity. In contrast to the predictions of the model, positive productivity shocks are estimated to be more expansionary at the ZLB compared to normal times. However, in line with the predictions of the basic model, positive productivity shocks have a stronger negative effect on inflation at the ZLB.
The basic problem here is that expected inflation doesn’t matter, what matters is expected NGDP growth. And while a positive supply shock does indeed reduce inflation, that sort of disinflation is the good kind. What really matters is NGDP growth, which is not reduced by positive supply shocks.
Here’s one implication they draw from their study:
In the meantime, since our empirical results are difficult to square with the textbook theory, caution seems to be in order when advocating for policies such as forward guidance and fiscal stimulus, both of which are predicted to be highly expansionary when policy is constrained by the ZLB.
BTW, if economists seriously want to argue that inflation matters, they really ought to come up with a coherent definition of inflation. So far they have failed to do so.