Video interview: Olivier Blanchard on inflation

A celebrated macroeconomist offers his views on supply vs. demand, monetary policy, and more

Olivier Blanchard is among the most respected macroeconomists of our times, and one of the most cited macroeconomists in history. He was a professor at MIT for a long time (now emeritus), and served as the chief economist at the IMF from 2008 to 2015. He is now a senior fellow at the Peterson Institute for International Economics, where you can read his thoughts on the economy (and you can also follow him on Twitter)!

Much of Blanchard’s voluminous work focuses on business cycles and monetary and fiscal policy. He was a key contributor to the development of the New Keynesian paradigm, which is the dominant theory of business cycles in macroeconomics today. In early 2021 he expressed concerns over the size of Biden’s Covid relief bill, arguing that it could cause substantial inflation (and unlike some other people issuing similar warnings, Blanchard showed his math). So I thought he’d be the perfect person to chat with about the current inflation and what should be done to contain it.

Key points from this interview:

• Blanchard believes that U.S. inflation is driven more by demand than supply, while in Europe it’s the opposite. He thought the 2021 Covid relief bill was too large, but that the effect is exacerbated by shortages in sectors like chips, ships, and oil.

• He does not believe wages are driving inflation; instead, it’s consumer demand and product prices.

• He supports a one-time excess profits tax on companies in sectors where there have been shortages — e.g. oil. The proceeds would be redistributed to consumers, to make sure that real purchasing power doesn’t fall along with real wages.

• Despite his support for an excess profits tax, he does not think monopoly power is a significant contributor to the current inflation.

• Blanchard believes that there’s still a chance that inflation will subside on its own soon. But if it doesn’t, he thinks the Fed will do what it needs to in order to bring it under control.

• He thinks that if it looks like we’re entering a recession, the Fed will go slower on the pace of interest rate increases, but won’t change its target,

• He does not believe we’re yet in danger of a regime shift in inflation expectations; he believes that would take several years.

• Blanchard believes that 3% is a better long-term inflation target than 2%. He thinks that if we get down to 3%, there will not be much appetite to force inflation even lower.

• New Keynesian models inform his thinking about the basic processes at work in the economy, but several of the equations of the basic model are so unrealistic that there are limits on how precisely he trusts those models.

---