Category Nick Rowe
Monetary and Fiscal Federalism, Debt, Canada, and the Eurozone.
A government that undertakes a commitment to target 2% CPI inflation does not, strictly speaking, "borrow in its own currency". Its bonds are an indirect promise to pay, via transversality transitivity (damn!), a specified quantity of CPI baskets of goods and services. In much the same way that bonds under the gold standard were an […]
Price Level Targeting targets the Stickiest Prices; Inflation Targeting targets the more Flexible Prices
And it's good to target the stickiest prices; and bad to target the more flexible prices. It means that recessions under inflation targeting can last as long as it takes for the stickiest prices to change. Which is bad. And it's especially bad for us old macroeconomists, who remember that the whole point of New […]
The Tale of the Two Cobblers (collusive price cuts)
Mostly for fun, and teaching. But I think it might matter. A village had two cobblers. The right-handed cobbler was best at making right shoes. The left-handed cobbler was best at making left shoes. So the villagers would buy one shoe from each cobbler. Other villages were some distance away, so the cobblers had monopoly […]
“Profits = Investment – Saving”
Or, "Profits = Expenditure – Income". Those are just alternative ways of saying the same thing, for a closed economy, if investment and saving include government investment and saving. Most economists will say that's wrong. And it is wrong by standard definitions, where aggregate expenditure and income are the same thing, and investment and saving […]
“Monetary Policy Accommodation” and Upward-sloping IS curves
If you believe that the IS curve slopes up, then what the Bank of Canada says about "monetary policy accommodation" makes sense. If you believe the IS curve slopes down, like in the textbooks, then it doesn't make sense. This is supposed to be a simple teaching post. My own mind is pretty simple anyway. […]
The (In)efficiency of Perfect Price Discrimination
I have always thought, and taught, that Perfect Price Discrimination leads to an efficient allocation of resources. I now think that is wrong. It only seems to work if we use partial equilibrium reasoning, for a single monopolist that practices PPD, holding constant consumers' income and the monopolist's Marginal Cost curve. It doesn't work in […]
A Balassa Samuelson theory of negative real interest rates despite productive investment and impatient representative agent
I think this is right (but I can't do the math to work out an example to be sure, though any competent grad student could). The idea is that you can get negative interest rates, despite productive investment and impatient consumers, because the prices of the goods you can invest to produce more of will […]
Don’t even try to “Normalise” interest rates
If you think that the rest of the economy is normalised, so it is time to normalise interest rates too, you are wrong. If the rest of the economy is normalised, then interest rates must already be normalised. Wicksell said there was some underlying "natural" rate of interest. If the central bank sets a rate […]
The Sustainable Bond-Finance Laffer Curve
Imagine an economy growing at rate g, with an interest rate on government bonds r, and a constant debt/GDP ratio D/Y. The government gains revenue from issuing new bonds gD each year, and loses revenue from paying interest rD each year. If r<g then the government earns positive net revenue from having and maintaining a […]
Seeing through Sovereign Wealth Funds?
In the first country, the government imposes a 50% flat tax on each individual's income, and uses the proceeds from that tax to finance an annual $10,000 transfer payment to each individual. The government has zero debt. In an otherwise identical second country, the government has a sovereign wealth fund that owns a 50% non-voting […]
Worthwhile Canadian Initiative 
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