Category Monetary policy
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 […]
Monetary policy is always and everywhere about expectations
Paul Krugman is frustrated because people aren't taking his model of the liquidity trap seriously. OK, let me take it seriously. Suppose Paul's model is 100% true. And suppose that Paul's model economy is humming along nicely, at full employment, and everyone in the model expects it to continue humming along nicely, at full employment, […]
Helicopter money is normal, or else we’re doomed!
With one exception, Tony Yates strikes me as being a very sensible and very good money/macro economist. But at the mention of "helicopter money", he seems to turn into an Old Testament prophet, or maybe Private Frazer from Dad's Army, saying "We're doomed, I tell ye!" (or maybe this longer video makes my point better). […]
Temporary vs permanent elasticities
This is (supposed to be) a simple "teaching" post. There should be nothing new here. Just a newish way of presenting old stuff. The more interest-elastic the demand for money, the more important is the distinction between temporary vs permanent changes in the money supply.
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