Category Macro
Ricardian Equivalence and government spending
If the government takes our money (through taxes), and spends it on our behalf, does that increase aggregate demand? If the government borrows our money, making us pay back the loan (through future taxes), and spends it on our behalf, does that increase aggregate demand? The answer is: it depends. It depends on what the […]
Government borrowing, private spending
1. "If a private firm decides to borrow more and increase its investment spending, aggregate demand will increase." 2. "If government decides to borrow more and increase its investment spending, aggregate demand will increase". 3. "If government decides to borrow more, and lend to a private firm to increase its investment spending, aggregate demand will […]
Strengthen automatic stabilisers instead?
Suppose you believe that Canada (or the US, or wherever), needs a more expansionary fiscal policy now. If so, answer these questions: 1. Would you also recommend a more expansionary fiscal policy at some future time, if Canada ever found itself in the same situation as it is now? 2. If so, why would you […]
How do we reduce our debt/income ratios? The paradox of debt.
It's a common theme that the financial crisis was caused by too much debt, relative to our incomes. So if we want to get out of the crisis, we need to reduce our debt/income ratios. How? For an individual, the answer is easy and obvious: spend less, save more, and pay down debt. But for […]
Canada and the Eurozone: a comparison
I keep an eye on various European economics blogs (especially VoxEu and Maverecon). We often compare Canada and the US. I want to compare Canada and the Eurozone, just for a change. I want to revisit the Optimal Currency Area question, in the light of the financial crisis. The Eurozone is like Canada would be, […]
Default, expected default, and wealth
Actual default on existing debt reduces aggregate wealth a bit; expected default on existing debt reduces aggregate wealth a bit; but expected default on new debt reduces aggregate wealth a lot. Redistribution of wealth from creditors to debtors may reduce aggregate wealth a lot. Default is a symptom of that problem.
One useful insight from Austrian business cycle theory
I am not an Austrian, but… Three decades ago (ouch!) I made a valiant effort to understand Austrian business cycle theory. I failed. I wanted to believe it, because I found the existing theories (Old Keynesian or New Classical) unsatisfactory. But I couldn't get it to make sense.
The changing game between monetary and fiscal authorities
Who's in charge of aggregate demand? Monetary policy affects aggregate demand; fiscal policy affects aggregate demand. How the monetary authority acts may depend on how it expects the fiscal authority to act, and vice versa. What happens depends on the rules of the game they are playing. The rules of the game have changed in […]
Loanable Funds and Liquidity Preference; DeLong vs. Fama
This is a (probably hopeless) attempt to clarify the debate between Brad DeLong and Eugene Fama over whether an increase in government spending, financed by borrowing, will increase aggregate demand. There's something important that's missing from the debate: the rate of interest; and money.
Pump-priming and the Keynesian Laffer curve
Update: since what I thought was my most controversial post ever has drawn precisely zero comments, let me re-title it: "A fiscal stimulus can more than pay for itself". The English language is full of dead or dying technological metaphors. How many people have ever primed a pump or kick-started a motorcycle? (I'm old enough […]
Worthwhile Canadian Initiative 
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