Bryan Caplan  

Nominal GDP and PSST

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Arnold tells us:
The PSST story is equally consistent with a correlation between employment and nominal GDP. It just interprets the causality as running the other way. If a bunch of workers are laid off, for whatever reason, nominal GDP will go down, unless productivity and/or inflation rise in order to compensate.
But Arnold, without nominal rigidities, why doesn't the PSST model specifically predict that prices will adjust to restore full employment?  And if you allow nominal rigidities, what does PSST add to the standard Sumnerian story?  I don't mean to be difficult, I just don't understand how PSST makes sense without nominal rigidity.

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COMMENTS (4 to date)
Adam writes:

This just gets right back to the ZMP debate, right?

david writes:

It's a real rigidity story, as I read it. But PSST is confusing to describe in terms of rigidities.

D. F. Linton writes:

Nominal price rigidity is not the only mechanism that slows the adjustment of the real economy. Figuring out exactly how things have changed will take varying amounts of time and effort for the divers actors in the economy, due to both information availability and Bayesian-like mental model adjustment processes. There are many other real-world "frictions". PSST and ABCT both consider these effects and reject the idea of instant, cost-free adjustments (not only of prices). This makes these theories more realistic even if it distances them from Perfect Competition, General Equilibrium, or Hydraulic Keynesianism.

PrometheeFeu writes:

I'm going second Adam on this. ZMP explains why they are currently unemployed, PSST explains why they eventually get hired again.

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