Category Monetary policy
What next for the Bank of Canada?
The Bank of Canada currently sets the overnight rate at 1%. Markets expect it to cut by about 50bp on Tuesday. I think it should cut to zero (or 0.25%, which is effectively zero, given the traditional spreads). I thought it should cut to zero back in December. But if it does cut to zero, […]
Can Canada recover alone? Why not, exactly?
If Canada gets its macroeconomic policies right, is it possible for Canada to recover from the recession, even if the rest of the world does not? The same question could be asked for any individual country. And if not, why not?
I hope Hillary fails
Nothing personal, but I just do not understand why she is asking China to buy more US treasuries. This just doesn't make any sense to me. She ought to be doing the exact opposite. Can someone explain it? Regardless of the ultimate cause of the crisis (and China and perhaps Japan saving too much and […]
A very simple macro model of the last few years
Here is a very simple model of interest rates, debt, asset prices, and recession. It seems to fit the facts of the last few years reasonably well. There are two types of people: the A's and the B's. The A's have normal interest-elastic savings and investment functions. They save less and invest more if the […]
Deflation is on the horizon, but how far away is it?
The Canadian and US CPI numbers were released today. Here's what's been happening with the Canadian core CPI (which excludes energy, food and other volatile prices): And here's the series for US CPI less food and energy: I'm pretty sure that Mark Carney is glad that he doesn't have Ben Bernanke's job. The US is […]
At least we don’t have the Gold Standard to worry about
Will this crisis be as bad as the Great Depression of the 1930's? One important difference is that we don't have the Gold Standard now. That's one good reason for optimism.
Sales taxes, other taxes, expected deflation, and Calvo price-setting
Gauti Eggertsson has an important ("preliminary and incomplete") working paper. It has been discussed by Mark Thoma and Justin Wolfers. The main argument is that tax cuts could cause expected deflation, which would raise real interest rates if nominal rates are stuck at zero, and this would reduce aggregate demand and output. Tax cuts are […]
What if both Greenspan and his critics were right?
In 2003, Alan Greenspan argued that the Fed needed to set low interest rates to prevent falling into a liquidity trap and deflationary spiral. (H/T commenter Declan). In 2008, Greenspan's critics argue that those same low interest rates caused an asset bubble, which burst, causing the economy to fall into a liquidity trap and deflationary […]
IS, LM, and two wedges: understanding the second wedge
A simple macroeconomic model of the current situation is the ISLM with two wedges. The first wedge between the IS and LM curves is the gap between nominal and real interest rates. The second wedge between the IS and LM curves is the gap between government and private interest rates. We add (or subtract) the […]
Stiglitz on inflation targeting: A Canadian perspective
I don't understand this. Davos Man's Depression: The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability. Central bankers’ belief that controlling inflation […]
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