From Mark Thoma and Paul Krugman (and Paul Krugman, and Paul Krugman).
- The Thoma post is especially good. I think the video he has up describing adaptive learning in a New Keynesian model should be easy enough for most people who are somewhat familiar with the issues to understand.
- The first Krugman post is important too. I've had trouble following Krugman's views on monetary policy. I can't get a grip on whether he's making the arguments of Keynes in 1933, or Sumner in 2010. This seems to clear it up, and the verdict seems to be Keynes in 1933: "The whole point of that paper was that when you’re up against the zero lower bound, it doesn’t matter how much money you print — not unless you credibly promise higher inflation." Good. I agree with that. I think we have good reason to be monetary policy skeptics right now, and Krugman doesn't always seem all that committed to that point. This clears it up - it's a long-run expectations thing, not a business-as-usual monetary policy thing.
- The third Krugman link actually bothers me some. I have trouble projecting inflationary behavior for this episode using the last couple episodes we were in. The trajectory is clearly different - something different is going on here, and so I'm not sure it's wise to compare cases like he does. That's not to say that I'm not concerned about deflation - I am - I just don't think using a standard Phillip's Curve explanation of it is necessarily the best way to talk about it. A better way to talk about it is presented in his second link.
Wednesday, September 1, 2010
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Actually, Kregel's paper critiquing Krugman 1998 shows that Krugman really didn't understand Keynes. http://www.levyinstitute.org/pubs/wp298.pdf
ReplyDeleteThanks Scott - I only had a chance to skim the beginning of it, but it seems to hinge on the distinction between Keynes and Hicks.
ReplyDeleteI've never been too troubled by the Hicks/Keynes distinction, although it was clear that Keynes himself rejected the ISLM model (I blogged about this here: http://factsandotherstubbornthings.blogspot.com/2010/07/keynes-on-is-lm-keynesianism.html)
At the end, Kregel makes the remark that what we should be pursuing is not a policy of credible inflation, but of credible low interest rates. I'm wondering (without reading Krugman's 1998 paper recently or this paper) whether some of this is just a confusion between nominal and real rates. I've never understood Krugman to be saying that rising real long term interest rates is desirable. What he has said, as I understand it, is that because of the deflation trap real rates are high and you allow them to be reduced by increasing inflation and inflation expectations, which may indeed raise nominal interest rates (although any upward pressure on long nominal rates should be taken as a sign that policy is working).
It's also important to remember that this is only the monetary facet of what Krugman is saying. He's not sitting around claiming that we can inflate our way out - he's suggesting that credible long-term inflation is what the Fed should be engaging in, while the Congress commits to demand management.
See pages 4, 5, 6 in particular, as Kregel details how Keynes rejected the concept of a real interest rate altogether. Also, Kregel notes at the very end that what is really needed was a "credible increase in the return on investment," which is not the same thing as a reduction in nominal or real interest rates. As he says, it's a problem of too little AD, more than it is a liquidity trap.
ReplyDelete1. Well of course - but policy lever Keynes was looking at was a lower interest rate.
ReplyDelete2. Are you under the impression that Krugman or I are ignoring a problem of too little AD? As I said, "It's also important to remember that this is only the monetary facet of what Krugman is saying. He's not sitting around claiming that we can inflate our way out - he's suggesting that credible long-term inflation is what the Fed should be engaging in, while the Congress commits to demand management."
1. OK--my point there was that Krugman's focus on the real rate is not Keynes's liquidity trap or the remedy for it.
ReplyDelete2. No, not at all. The point is that Kregel/Keynes reject that generating "credible long-term inflation" would work to improve AD because they reject the real rate of interest.