Former Swedish Prime Minister Carl Bilde – who normally is a clever man, but not an economist – is puzzled:
I have an answer from the economic textbook for Carl Bildt. We are at point B now.
We are now in the process – at least in the US – of tigthening monetary policy so pushing the aggregate demand curve back leftwards and at the same time labour market inflation expectations are shifting upwards which will shift the short-term aggregate supply curve back towards the long-run aggregate supply curve and we will end up with a price level somewhere between A and C and a production (and unemployment) at the structural long-term level. Hence, higher unemployment than now.
It’s really, really simple.
PS the story is exactly the same for the euro zone and for the Swedish economy.
TravisV
/ July 14, 2022Mr. Christensen,
TravisV here.
Could you please explain why both the (Ukraine-ravaged?) Euro AND the (less Ukraine-ravaged?) Yen have weakened relative to the U.S. dollar?
Could it be that in both cases, the weakness is primarily driven by something other than the war in Ukraine?
Thanks.
Lars Christensen
/ July 15, 2022What the euro zone and Japan has is common is that both countries are energy IMPORTERS, while the US is an energy EXPORTER. With rising energy prices this is a rather important different.
Furthermore, the Bank of Japan is activily weakening the yen by pegging long bond yield to zero and thereby eftectively easing monetary polich while the Federal Reserve have moved to tighten monetary conditions.
So given the different shocks to terms-of-trade and the differences in monetary policy it isn’t hard to understand the moves in the dollar, the euro and the yen.