Category Monetary policy
Why isn’t the multiplier infinite?
Assume the worst case scenario. Your economy is stuck in a permanent liquidity trap. It will stay there forever, unless you do something. Do you have to do something big, measured in the trillions of dollars? Suppose you do something, something very small, that has a direct effect of increasing Aggregate Demand by $1 per […]
A self-contradictory communications strategy
Does loosening monetary policy mean lower or higher nominal interest rates? An article in today's Financial Times (H/T Brad DeLong) is a good illustration of the problems that arise when central banks frame monetary policy as a (conditional) time-path for nominal interest rates.
Canada, the Eurozone, and interest rates
This is something I know I don't understand. Compare the following two statements: A: "Some Eurozone countries have higher interest rates on their government bonds, reflecting higher perceived risk of default. This raises all interest rates in those countries, and so reduces aggregate demand in those countries." B: "Some Canadian provinces have higher interest rates […]
Currency wars and forced dissaving
The Fed is the loan placement officer for the world's central banks. The US government is the Fed's borrower of last resort. The forced loans can be called in at any time the lender wishes. People are different; that's why they trade. Sometimes that trade will take place between people who live in the same […]
The quick and dirty way of putting money into macro
This post is really about maths, dark ages, and understanding macro. There are two ways of putting monetary exchange into a macroeconomic model: the proper way; and the quick and dirty way. Keynesians generally use the quick and dirty way. That's OK. But there may be problems if people don't understand what you are doing. […]
Stocks and bonds, and capital and money
How will we know that "QE2" is working? Judging from rising stock and bond prices, some will conclude it's working already, even though we haven't seen it yet (which is no surprise, because expected future monetary policy matters as much or more than current monetary policy). But I'm waiting for stock and bond prices to […]
Was Milton Friedman right after all???
Milton Friedman said a lot of things that were very controversial 40 years ago, but are now part of the economics mainstream. The natural rate hypothesis, and the view that monetary policy should have prime responsibility for aggregate demand and inflation, are now part of the New Keynesian orthodoxy. This shows how much Milton Friedman […]
The paradox of thrift vs the paradox of hoarding
Would a sudden fad for antique furniture cause a recession? If, like Paul Krugman, you believe in the paradox of thrift, and if you follow the remorseless logic of your mistaken model, you should answer "yes". I don't believe in the paradox of thrift, and would answer "no". There is no paradox of thrift. There […]
Targeting the stickiest price.
Suppose the price of apples is sticky, but the price of everything else adjusts instantly to its equilibrium value. There is then an old, and strong, argument that monetary policy should target the price of apples. The economy performs best when all prices are at equilibrium. If the price of apples won't move (quickly) to […]
The End of Finance? The monetisation of everything.
I know it's wrong, or at least deeply problematic, to adopt a teleological view of history: to say that History has an End, or Purpose, and is inexorably driven by deterministic Iron Laws towards that End, with perhaps an occasional hiccough along the way. But I can't stop myself. What is the End of Finance? […]
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