Why can't all banks be as safe from insolvency as the Bank of Canada? I put a question on my final exam: "What is a bank? Should banks have legally required minimum reserve ratios? What about 100% reserve ratios? Should banks have legally required minimum capital ratios? What about 100% capital ratios?" I wanted the […]
Never reason from an increase in inequality. What the effects of increased inequality are, and whether it's good or bad, will depend on what caused that increased inequality. Inequality is an endogenous variable. So let's think of a government policy that would cause increased inequality, and talk about that. Suppose the government gave every Canadian […]
Think about a model where prices are determined by relative bargaining power. The buyer wants to do the deal, but wants a lower price. The seller wants to do the deal, but wants a higher price. Each threatens to walk away from the deal if the other side refuses to budge on the price. The […]
I'm not 100% sure what Paul Krugman is arguing here, but I think he is probably wrong. And I'm going to take him up on his invitation: "(I’m going to try some formal modeling on all this, but if anyone else wants to jump in, be my guest.)". Not that my modelling here is very […]
Here is a simple way to think about the correlations between nominal interest rates and inflation rates. We need to distinguish between three "Fisher curves": the long run; the medium run; and the short run Fisher curve. We need to distinguish between: the actual inflation rate; the central bank's inflation target; and what people expect […]
I have been arguing with John Cochrane and Steve Williamson over whether central banks announcing higher nominal interest rates is inflationary or deflationary. The very fact that economists are arguing about that very basic question tells us something important about central banks' using nominal interest rates as a communications strategy: it sucks. This is a […]
This is in response to John Cochrane's good post. First off, you need to understand that Keynesians don't actually believe their own New Keynesian models. When they reason informally, they always assume inertia in actual or expected inflation. But the standard New Keynesian model, with the Calvo Phillips Curve, doesn't have inflation inertia in it. […]
(I'm not 100% happy with this post. Too much emphasis on interest rates, for one thing. I sat on it for a few days, but have decided to post it anyway. Because I like my question better than I like my answer. So let's see your answers.) David Glasner has a very good post: Does […]
Just one small snippet of news from Greece (HT MacroDigest), but to my mind a very important extra bit of evidence that confirms the monetary disequilibrium approach to understanding recessions:
Take just one example: the Calvo pricing model. In that model, the Calvo fairy visits each firm at random, taps it with her wand, and lets it change its price. The probability of her visiting in any period is 1/n, so she visits each firm on average every n periods. Firms know this and set […]
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