Monthly Archives: December 2014
“Temporary” increases in G at the ZLB in an NK model
Paul Krugman says: "Monetary policy at the ZLB requires a perceived regime change to be effective, fiscal policy doesn’t — in fact, fiscal policy works better if people believe that it’s temporary, and will end when the economy recovers." In a New Keynesian model temporarily stuck at the Zero Lower Bound with less than potential […]
The third-best case for fiscal policy, and moral hazard for central banks
1. If the central bank is doing it right, and targeting the right level of Aggregate Demand, there is no case for fiscal policy to try to influence AD. It's not needed. And it won't affect AD anyway, because the central bank will offset any changes to fiscal policy to keep AD on target. Fiscal […]
Why does Toronto have better outdoor ice than Ottawa?
Toronto is, on average, warmer than Ottawa. So why does it have better outdoor ice? Some might argue that it doesn't. Every winter, Ottawa's Rideau Canal freezes to form the world's largest skating rink. Just about every city park sports an outdoor ice surface. But almost all of the city's ice is natural. On warm days, […]
Doug Saunders has written a dreadful column about the “resource curse”, and I’m going to explain why it’s dreadful
This column by Doug Saunders on the "resource curse" in last Saturday's Globe and Mail is quite dreadful: When the price of oil is the foundation of your country’s economy, a sudden plunge to half its value focuses the mind wonderfully, doesn’t it? One's heart sinks at the very first sentence: the premise is wildy at odds […]
A proof of the need for fiscal policy to escape the liquidity trap
For simplicity, ignore government spending and taxes. "Fiscal policy" means lump-sum transfer payments. Suppose the economy is in a permanent liquidity trap. If we ignore the central bank's paper and ink operating costs, another name for the permanent liquidity trap is the "Friedman Rule". Both have the nominal interest rate on bonds at 0%, so […]
Language games and expectations of “doing nothing”
If I make one very trivial change to Paul Krugman's model of a temporary liquidity trap, I can change the results, so that the central bank can use current monetary policy to return the economy to full employment, even if it cannot make credible commitments about future monetary policy. I am going to change the […]
Monetary policy is always and everywhere about expectations
Paul Krugman is frustrated because people aren't taking his model of the liquidity trap seriously. OK, let me take it seriously. Suppose Paul's model is 100% true. And suppose that Paul's model economy is humming along nicely, at full employment, and everyone in the model expects it to continue humming along nicely, at full employment, […]
Helicopter money is normal, or else we’re doomed!
With one exception, Tony Yates strikes me as being a very sensible and very good money/macro economist. But at the mention of "helicopter money", he seems to turn into an Old Testament prophet, or maybe Private Frazer from Dad's Army, saying "We're doomed, I tell ye!" (or maybe this longer video makes my point better). […]
Temporary vs permanent elasticities
This is (supposed to be) a simple "teaching" post. There should be nothing new here. Just a newish way of presenting old stuff. The more interest-elastic the demand for money, the more important is the distinction between temporary vs permanent changes in the money supply.
Alpha, beta, and gold
Central banks issue currency. (They issue reserves too, but "reserves" are just the name we give to central bank currency held by commercial banks in electronic form rather than in paper form, and it makes no difference whether money is printed on paper, on plastic, or on computer disks.) Commercial banks issue deposits. (They used […]
Worthwhile Canadian Initiative 
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