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jean-philippe bouchaud

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Date
2022/09/11
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8
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Capital Fund Management | Chairman and Head of research
Content
Every month since the start of the current inflation rally, central banks workhorse models did stubbornly predict that inflation would rapidly go down -- only to be proven wrong the next month (see graph below).As recently reported in the FT “It was more or less impossible in our models to produce any inflation that would not be temporary,” Belgium central bank governor Pierre Wunsch, an ECB council member, said last week, adding that they always showed price rises falling to the 2 per cent target, regardless of the assumptions. “We have come to the conclusion that we know much less about inflation drivers than we thought.” https://lnkd.in/ehyev8j8Well, indeed. There are unfortunately many inflation channels that cannot be captured by standard general equilibrium models. In equilibrium, supply = demand in both good markets and in the labor market, so the “obvious” channel by which prices (wages) increase because demand exceeds supply is just absent. In standard (dynamic stochastic) general equilibrium models, inflation is driven by a positive output gap (overheating of the economy), itself only possible when prices cannot adapt immediately. Inflation expectations are assumed to be rational and hence only affected by true economic shocks and by the anticipated policy of central banks – there is no room for animal spirits, overreactions, or feedback loops from past realized inflation into inflation expectations.  Models based on the rather silly assumption of equilibrium failed in and after 2008, when JC Trichet declared: “Macro models failed to predict the crisis and seemed incapable of explaining what was happening to the economy in a convincing manner. As a policy-maker during the crisis, I found the available models of limited help. In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools.”. They failed again in 2021, and led c
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Integromat
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https://www.linkedin.com/feed/update/urn:li:activity:6974825254665789440
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https://www.linkedin.com/in/jean-philippe-bouchaud-bb08a15/
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