Category Fiscal policy
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 […]
FTPL: a federal or provincial issue?
[Apologies for the title. It's a Canadian joke, about our fixations, that can be told various ways, but always ends with the punchline: "Elephants: a federal or provincial issue?"] Does fiscal policy affect the price level? If so, are we talking about federal fiscal policy only, or are we talking about provincial fiscal policy too? […]
Who would ever lend to an FTPL government?
Think back to philosophy class: Would you ever believe the promise of an Act-Utilitarian? No. An Act-Utilitarian will perform action A if and only if action A will maximise the sum of expected present and future utilities. His past act of having promised to do A is not a reason for the Act-Utilitarian to perform […]
Currency is alpha; bonds are beta
If you understand the title you understand the post. It's obvious really. Betas peg their exchange rate to alphas; alphas do not peg their exchange rates to betas. Beta's promise to redeem their liabilities for alpha liabilities at a fixed exchange rate; alphas make no such promise the other way. So alphas lead and betas […]
The degeneracy of FTPL
Consider a corporation that earns a flow of (real) profits S(t). Assume for simplicity the corporation finances itself by issuing only shares (it does not issue bonds). Let the stock of shares be M(t). Let the reciprocal of the share price be P(t), so the share price is 1/P(t), and so the total market value […]
Short Run vs Long Run order of moves between monetary and fiscal authorities
Who moves first, and who moves last? In a game between the monetary authority and the fiscal authority, the order of moves matters. Just like in Stackelberg duopoly, where the effect of an increase in one firm's quantity will depend on whether the other firm is the leader and has already chosen its quantity, or […]
Reverse-engineering David Andolfatto’s and Stephen Williamson’s Neo-Fisherian paper
Stephen has a new post defending the Neo-Fisherian perspective. He links to a new paper he and David wrote (pdf). It is not an easy paper. This is what I think is the intuition behind the results. Start with the Fiscal Theory of the Price Level, where B is the nominal stock of government "bonds", […]
The over-investment and under-saving theory of the ZLB
This post is ironic. I have a really neat new theory of what causes countries to hit the Zero Lower Bound. It's got a beautifully counter-intuitive policy implication. The government needs to tax investment, or subsidise saving, to help the country escape the ZLB. What I need is a co-author to help me do some […]
Bond Finance and the Great Depression
Attending the Social Science History Association Meetings in Toronto this weekend provided as usual an opportunity to take in new papers and ideas, digest them and then think about what further insight they might add to our knowledge of past economic events. One such paper was Richard Sutch’s (University of California) “Financing the Great War: […]
Worthwhile Canadian Initiative 
Recent Comments