Theory of inflation dynamics is not good enough, warns Tarullo

Former Fed policymaker says economists are too reliant on shaky concepts

Daniel Tarullo
Daniel Tarullo

Economics lacks a “working theory” of inflation dynamics that is “useful for real-time policymaking”, former Federal Reserve governor Daniel Tarullo warned on October 4, raising serious challenges for those trying to set monetary policy.

Many of the economic relationships underpinning standard monetary policy analysis broke down around the time of the financial crisis or even earlier, Tarullo said. “Unobservables” such as the natural rate of unemployment or equilibrium interest rates are

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