Never Reason From a Price Change

This is a very useful saying and reminds us all that we can very rarely look at the reduced-form equation. We need to look at the whole system of equations. Scott Sumner discusses some other things we shouldn’t reason from here.

Among my favorites:

6.  Never reason from an aggregate wage change:  (Yes wages are a price, but I haven’t discussed this one yet.)  Higher real wages could be healthy, reflecting faster productivity growth.  Or they could be unhealthy, reflecting deflation and sticky nominal wages.

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