Quote:
Originally Posted by Semtex
What I thought Zygote was saying, that you were responding to, was that Bernanke had said that the Fed fixes interest rates because it has to combat price stickiness (which would be a short run problem). I could have misread that.
Ah, I see now. I think over the next day or so I'll look some stuff over. I'd like to see the quote from Bernanke to get everything in context--not that I don't think he said that, but I'm not quite getting why he'd say that, so I would like a little more info before saying 'maybe he meant this or that'.
Though I think I might do that anyway. The general thought is that if we go in a recession firms (by definition) are making less. The natural response in a competitive market would be that the wages of laborers drops--the demand for labor shrinks, moving the equilibrium down and to the left, representing a lower wage and a lower number of people hired. But with sticky wages those wages don't decrease. So we wind up with even less hours of labor demanded but more supplied (compared to what the equilibrium 'should be', without price controls). This means even fewer people are employed with those price controls.
Lowering interest rates would increase the demand for goods, since it makes buying big ticket items cheaper--and that could affect smaller ticket items as well. This would increase the price of goods, which would increase the demand for labor. Thus the 'equilibrium wage' would increase, and if it gets high enough the stickiness would no longer affect the market, and we'd get to a point where everyone how wanted a job could have one (minus the frictional, unavoidable employment). That's the natural level of employment which maximizes growth--and is where we'd expect to be in the long run.
So maybe that's what Ben was talking about...
(edit: you could make a similar argument with sticky prices instead of wages, but the same idea applies--the stickiness of prices causes us to enter a disequilibrium condition that reduces the level of output)