Category Macro
Does monopoly power cause inflation? (1968 and all that)
Here's a question for you: Suppose there is a permanent increase in monopoly power across the economy (either firms having more monopoly power in output markets, or unions having more monopoly power in labour markets). Would that permanent increase in monopoly power cause a permanent increase in the inflation rate? Most economists today would answer […]
The New Keynesian case for anti-inflation price controls
Take a very standard New Keynesian macroeconomic model. The two key ingredients (the only ones that matter for this post) are: monopolistically competitive firms; the Calvo Phillips Curve. In that model, if there are no macroeconomic shocks, the equilibrium level of output and employment is below the efficient level of output and employment. Because it […]
There are no Friedmans today, except maybe Friedman himself
How come no economist on the right is asking "Where are the Galbraiths of yesteryear?"? It's because Milton Friedman won the debate, and John Kenneth Galbraith lost. Both Friedman (on the right) and Galbraith (on the left) were once leading public intellectuals and economists. I used to read them both. I wonder how many young […]
Is low inflation good news?
Suppose Statistics Canada reports the latest inflation data, and I am surprised to learn that inflation is lower than I had expected it to be. Or below the Bank of Canada's 2% target. Is that good news or bad news? For most of my life I would have said that is good news. "So inflation […]
A simple model where NGDP targeting beats inflation targeting
Tony Yates complains that Market Monetarists don't have a model to justify their support for NGDP targeting. So I decided to build him a little model. It's a cruddy little one-period model, and it's really only a sketch of a model, but any competent grad student should be able to do the math to finish […]
Did inflation targeting destroy its own signal?
The Calvo Phillips Curve has a very special property: the subset of firms that change their prices in any period is a perfectly representative sample of all firms. That property makes the Calvo Phillips Curve very easy to use, which is why macro modellers like to use it. But that property stacks the modeller's deck […]
“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 […]
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 […]
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