SCOTT SUMNER

What triggers recessions are abrupt drops in NGDP [Nominal Gross Domestic Product]. If NGDP grows too quickly, monetary policy is too loose. With too much money chasing each transaction, prices rise, and the result is inflation. If NGDP falls abruptly, on the other hand, monetary policy is too tight—there is no longer enough money to pay everyone who wants to work or to fund all the transactions that would otherwise take place, and the economy starts to contract.... removing several percentage points of expected NGDP growth will leave too little revenue to employ the existing work force at the wages they have negotiated. The result: rising unemployment.

What triggers recessions are abrupt drops in NGDP [Nominal Gross Domestic Product]. If NGDP grows too quickly, monetary policy is too loose. With too much money chasing each transaction, prices rise, and the result is inflation. If NGDP falls abruptly, on the other hand, monetary policy is too tight—there is no longer enough money to pay everyone who wants to work or to fund all the transactions that would otherwise take place, and the economy starts to contract.... removing several percentage points of expected NGDP growth will leave too little revenue to employ the existing work force at the wages they have negotiated. The result: rising unemployment.