Category Monetary policy
If you wanna run hot you gotta run steady
Canadian economist Richard Lipsey would always insist that the Phillips Curve is a curve, and not a straight line. Maybe because wages and prices are stickier down than up. Or maybe because unemployment can't go below 0%. Or both. Here's why that matters for macroeconomic policy: Suppose the central bank wants 2% inflation on average, […]
Loanable Funds Redux
Stop talking about "saving". Talk instead about "demand for assets". You will be happier, and your head will be clearer. Your students too will be happier, and their heads will be clearer. Demand for assets is a thing; saving is a non-thing (a residual). Things are clearer than non-things. Saving is the part of your […]
Two Price-setting Monopolists Meet in the Street
Two price-setting monopolists meet in the street. One says to the other: "I will buy 10 more of your overpriced bananas, but only if you buy 10 more of my overpriced apples in return. Deal?" The second monopolist accepts the deal. They meet in the street again the following day. One says to the other: […]
A Simple Micro/Macro Corona Tax Model
I want something you could teach to first or second year economics students. Using tools they already have in their toolkit. MICRO Start with a Demand and Supply model of the market for haircuts. If we put a $1 per haircut tax on buyers of haircuts, the demand curve shifts vertically down by $1, reducing […]
Relative supply shocks, Unobtainium, Walras’ Law, and the Coronavirus
Here's the basic idea: A temporary 100% output cut in 50% of the sectors (what the Coronavirus does) is very different from a 50% output cut in 100% of the sectors (what our intuitions might expect from supply shocks in aggregate macro models). The former can easily lead to deficient demand in the unaffected sectors; […]
Choosing the right target: Real options for the Bank of Canada’s mandate renewal
That's the title of a Max Bell School of Public Policy conference to be held in Montreal on April 30/May 1. I'm quite excited about it. A couple of years ago, I wrote a column scolding the Bank of Canada for the lack of transparency in the mandate renewal process. But after thinking about it […]
Increased Price Flexibility is Destabilising in New Keynesian Models. (And a Price-Level Path Target is Stabilising)
Start with a very simple New Keynesian "IS" (or "Aggregate Demand") equation: y(t) = E[y(t+1)] – a[r(t)-r*(t)] The "real" (inflation-adjusted) interest rate r(t) is defined as the "one period" nominal interest rate, minus expected inflation for the following "one period". In order to stabilise output y(t), relative to expected future output E[y(t+1)], the central bank […]
On not “running out of ammo”: Monetary Policy as Farmland Price Policy
Imagine a central bank that pegs the price of farmland. It announces it will buy or sell unlimited amounts of farmland for $10,000 per hectare. So "one dollar" doesn't mean some number of ounces of gold; it means "one square meter of farmland". So the central bank owns farmland, which it rents out to farmers […]
What killed real wage growth?
This is the Project Link chart that most startles me: What killed the growth in real wages in the early 1970s? I've been trying to come up with an answer to this question, and I think I have one. I'm not entirely sure that it's the correct answer, but I think it's a plausible conjecture.
Alpha Beta and the Libra Twist
Suppose I promise to be in the same place as you; but you make no promise to be in the same place as me. Then I am Beta follower and you are Alpha leader; because you go where you want to go and I must go to the same place to keep my promise. We […]
Worthwhile Canadian Initiative 
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