Category Macro
Long Run Growth and the end of The End of (Monetary Policy) History
Suppose everyone believes that we have reached The End of History, as far as monetary policy is concerned. The new inflation-targeting regime adopted by central banks has finally solved the age-old problem of the business cycle. There will be no more booms and busts. Maybe not yet solved perfectly, but the broad outlines of the […]
Apple Prices and Core Inflation
An economy produces two goods: apples and haircuts. The production function for apples shifts up or down every year at random, depending on the weather. The production function for haircuts never shifts. The weather causes relative prices to change. When there is good weather, and the apple harvest is large, the price of haircuts in […]
Path-dependence of measuring real GDP?
I normally try to avoid index number theory. Don't trust me on this. It is well understood that real GDP is a very imperfect measure of welfare. We teach that in first year macro. That is not what this post is about. What I'm worried about is whether real GDP is an imperfect measure of […]
Variety and Growth
A closed economy produces only apples, using fixed amounts of labour and land. Suppose there is an exogenous increase in the number of varieties of apples produced. With a constant returns to scale technology, GDP stays the same. But if people have a taste for variety, or a variety of different tastes, people are better […]
Hume’s Sailing Ships correcting Samuelson’s Icebergs
Paul Samuelson said (PITA gated) that David Hume's price-specie flow mechanism (ungated) was wrong. And I am saying, nervously biting my fingernails, that Samuelson was wrong. Assume that durable sailing ships are costly to build, but have low (or zero for simplicity) operating costs. Assume apples are the only tradeable good, and one ship can […]
AD/AS: a suggested interpretation
Many macroeconomists don't like the Aggregate Demand/Aggregate Supply framework often used in Introductory macro textbooks. Maybe that's because it isn't explained properly. So I am going to explain it my way. If you explain the AD/AS framework my way, you will see that it portrays a deep and realistic understanding of macroeconomics that is lost […]
Understanding Banks and Two Monetary Policy Instruments
Sometimes I write posts about things I don't understand and want to understand. (Or don't understand very well and want to understand better.) This is one of those posts. Suppose the government nationalises all the commercial banks, and merges them into the Bank of Canada. And suppose the Bank of Canada abolishes paper currency. So […]
John Cochrane On Neo-Fisherianism, again
First I am going to give you the intuition behind the model in John Cochrane's new paper. It's a very good paper, though I confess I've only skimmed it, because it's very long, and I don't understand all the math. Then I'm going to explain what I think is wrong with it. Then I'm going […]
Price Level vs Inflation Rate: semantic clarity
I write this for journalists, first year economics students, and the general (non-economist) public. Yes I'm being pedantic. But I hope it helps. I'm trying to clear up a very common confusion in how we talk about inflation. Your car has an odometer, which measures kilometers driven. And your car has a speedometer, which measures […]
From ISLM to NK Macro
Let me try it this way. This is written for macro students, and their teachers. But it's aimed at researchers too. It's about the role of money in macro models. Ignore what New Keynesian macroeconomists say about their own models. Listen to me instead. Start with the second-year textbook ISLM model. The price level P […]
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