Author Archives: wciecon
The (In)efficiency of Perfect Price Discrimination
I have always thought, and taught, that Perfect Price Discrimination leads to an efficient allocation of resources. I now think that is wrong. It only seems to work if we use partial equilibrium reasoning, for a single monopolist that practices PPD, holding constant consumers' income and the monopolist's Marginal Cost curve. It doesn't work in […]
A Balassa Samuelson theory of negative real interest rates despite productive investment and impatient representative agent
I think this is right (but I can't do the math to work out an example to be sure, though any competent grad student could). The idea is that you can get negative interest rates, despite productive investment and impatient consumers, because the prices of the goods you can invest to produce more of will […]
Don’t even try to “Normalise” interest rates
If you think that the rest of the economy is normalised, so it is time to normalise interest rates too, you are wrong. If the rest of the economy is normalised, then interest rates must already be normalised. Wicksell said there was some underlying "natural" rate of interest. If the central bank sets a rate […]
The Long Restructuring of Ontario’s Health Spending
Ontario’s hospital sector has made a submission to the provincial finance committee making the case that overcrowding has become so serious that there is a need for more funding. They are seeking a 4.55 percent increase in operating funds for the 2018-19 fiscal year in their pre budget submission. According to numbers calculated from data […]
The Sustainable Bond-Finance Laffer Curve
Imagine an economy growing at rate g, with an interest rate on government bonds r, and a constant debt/GDP ratio D/Y. The government gains revenue from issuing new bonds gD each year, and loses revenue from paying interest rD each year. If r<g then the government earns positive net revenue from having and maintaining a […]
Seeing through Sovereign Wealth Funds?
In the first country, the government imposes a 50% flat tax on each individual's income, and uses the proceeds from that tax to finance an annual $10,000 transfer payment to each individual. The government has zero debt. In an otherwise identical second country, the government has a sovereign wealth fund that owns a 50% non-voting […]
Negative Average Cost but Positive Marginal Cost of Debt-Finance
If the rate of interest on government bonds is less than the growth rate of the economy (r<g), then the average cost of bond-finance is negative. A government that has issued bonds, and issues more bonds each year to keep the debt/GDP ratio (B/Y) constant (which is sustainable), can have permanently higher spending, or permanently […]
Monetary tightening can lower real interest rates
It's the investment accelerator. Monetary tightening means lower expected NGDP; real interest rates can go either way. Think of this as a teaching post, to explain the intuition. Or look at Miles Kimball's great post. Here's a thought-experiment. Do not take this thought-experiment literally. It's just my weird way of doing the math, where I […]
The Bank of Canada’s “Hot Hand” experiment and Price-level Targeting
This (pdf) might be the most important controlled experiment economists have ever run. The results of this experiment have been influential in the Bank of Canada's decision (so far) to stick with targeting inflation rather than a price-level path. And making the right decision on that question could save many billions of dollars (trillions worldwide) […]
So What Happens in the Next Recession?
I’m not a macro economist by any stretch of the imagination and yet I cannot help wondering what is going to happen in terms of policy response the next time Canada goes into a downturn. It is not a question of whether there will be another recession, only when. By policy response, I am of […]
Worthwhile Canadian Initiative 
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