Category Macro
On understanding and spinning your own New Keynesian model
If I were a different sort of person, I would now be accusing some macroeconomists of deliberately misrepresenting the policy implications of their models in order to further their own political agenda. But I am not that sort of person. I don't generally go for conspiracy theories. And I myself used to make the same […]
New Keynesian multipliers, and the expansionary effects of falling government spending
Microeconomic models usually have negative feedback. Take a simple demand and supply model. Suppose there is a shock that causes the demand for apples to increase by 100 apples. That creates an excess demand for apples that causes the price to rise, that causes the quantity demanded to fall. If the supply and demand curves […]
House prices “bubbled” because Turgot’s land beats Samuelson’s “money”
This post won't be as clear as I want it to be. I'm trying to get my head straight on something. Sorry. Why are real interest rates positive? Turgot's answer was "Well, suppose they weren't, and never would be. Then the price of land would be infinite, because the present value of the rents would […]
Why Ontario Will Not Be Balancing the Budget Anytime Soon
Ontario released its fall economic statement this week and the government insists that it will be balancing the budget by 2017-18. From an actual deficit of 9.2 billion dollars for 2012-13, it is anticipated that the deficit will be 11.7 billion dollars in 2013-14 and will go down to 3.5 billion dollars by 2016-17. Yet, […]
Naive vs rational expectations is a (partly) false dichotomy
[Update: short version. It is not stupid to use rules of thumb. Rules of thumb can be rational. It is stupid to use rules of thumb that don't work well in the world you live in; and never change those rules of thumb if the world changes. And in the olden days, before rational expectations, […]
What determines long run private debt/GDP ratios?
Are you concerned about high and rising private debt/GDP ratios? Then look at this World Bank data, and you will get a whole new perspective on the question. Would you feel less worried if Canada had the same ratio as Afghanistan? You will see massive cross-country differences in private debt/GDP ratios. The ratios range from […]
On “letting the market set interest rates”
Most people who say "interest rates should be set by the market and not by government-owned central banks" are confused. But not all who say that are confused. People who want the government to get out of the money business altogether, and de-nationalise money and central banking, are not confused. They might be right or […]
Asset prices and the retirement revolution
Sometimes I have to remind myself that the sort of short run macro I do doesn't really matter much. Things like the recent global recession don't make much difference in the big scheme of things. So I'm writing this as an antidote to my own narrow perspective. Or, maybe I'm just a typical boomer seeing […]
Immaculate transfers and the monetary transmission mechanism
Assume that corn is identical across all countries, and is freely traded with zero transportation costs. We then know that "the law of one price" will hold for corn. The price of corn in Canada will be the same as the price of corn in the rest of the world. Why? Suppose it weren't. First […]
The best cure for “easy money” is easier monetary policy
Reading Bank of Canada Monetary Policy Reports doesn't normally annoy me, but reading this latest one did. Specifically, this bit: "Although the Bank considers the risks around its projected inflation path to be balanced, the fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance. However, the Bank […]
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