Austan Goolsbee: evaluation

Transcript context

…Why are those wrong? What’s the theory in your mind? You’re trying to teach me. I’m in your class. Let me finish one thought, and then let’s come back to what’s wrong about it. I still like, most of all, the basic supply-and-demand framework, and before you can conclude anything, you’ve got to get a taste of, is this a supply shock or is this a demand shock? In a way, a lot of the machinery of central banking and macro analysis, let’s call it, is oriented around demand. I’m not disputing that, in the past, that has been the source of the most frequent business cycle variations, but I’ve tried to caution everybody in weird moments, like when you’re getting major developments on the supply side — whether they’re labor supply, or supply chain, or productivity growth, or a number of things that are hitting the supply side. Maybe all bets might not be off, but the training sample LLM version of being a central banker is going to be prone to hallucination problems because it’s going to give you things that are wrong because supply shocks might be driving inflation, not demand. Then go back to your other question of, “Well, what’s wrong with taking M2? And why would it no longer be as correlated with price inflation? ” I think that a lot of that is because of financial innovation that we have at great pride, and I love the cash vault at the Chicago Fed. They don’t like it if I say exactly how much money is in there. I’ll just say, many tens of billions of dollars of cash are in that vault, and we run hundreds of millions a day in and out. There was a time when that cash use was central to the payments of the United States, and bank accounts, and checking accounts, and writing a physical check — again, central to the function of the financial system. As we’ve spread to electronic payments and credit cards and debit cards and that sort of thing, it has made . . . I guess in the old model, you would say it’s radically changed the velocity of money. It wasn’t just M equals PY. It was M times V. If M is moving around, and V is moving around at the same time, you’re going to get a little mixed-up interpreting to over-indexing on that theory. Okay, if the instability comes from the velocity side, that means that we should favor a monetary-growth rule to target the growth path of a nominal GDP, M times V, right?…

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