Here.
Questions:
1. Do we think λ=∞, even if we accept a simple IS-LM set up regarding m?
2. Do we agree m is endogenous and a simple IS-LM set up regarding m probably isn't right?
3. So do we still think λ=∞?
I see no sign that for the Fed, λ=∞. Bernanke-Evans doesn't make λ=∞, although it inches closer. But I still don't think that the FOMC sets λ at ∞. Neither do the markets, I imagine. And since money is endogenous that matters.
There is an important role for fiscal policy. For God's sake, can we at least get it on trend? If you think sectoral balance and patterns of sustainable trade are important you should at least be able to endorse keeping government spending on trend.
And please don't tell me that because I'm endorsing fiscal policy I am somehow arguing against monetary policy. It is not Scott Sumner Day, and neither was Thursday.
Saturday, September 15, 2012
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"There is an important role for fiscal policy. For God's sake, can we at least get it on trend? If you think sectoral balance and patterns of sustainable trade are important you should at least be able to endorse keeping government spending on trend."
ReplyDeleteDaniel, couple of questions:
1. In the Keynesian model, when Aggregate Demand is fixed, what happens when G drops? The only way I can think it has an effect is by a supply shock.
2. Similarly, when Aggregate Demand is not fixed, and G could boost Aggregate Demand, what about the effect under #1?
In sum: how important are sectoral balances and patterns of sustainable trade when aggregate demand is stimulated by G versus with how important these are when G is withdrawn?
I can guess as it is hardly taken into account when selling a stimulus that it is not very important in that paradigm; I am therefore puzzled as to why you'd think it is important when it is withdrawn reasoning from that paradigm.
It's nice to see fiscal policy getting some recognition here while excitement over monetary policy persists. In thinking of the macro-economy, I find the sectoral balances framework extremely helpful. From this perspective, it's not hard to see why monetary policy will have little impact on NGDP at this time and fiscal policy should be the focus.
ReplyDeleteOne point of clarification, sectoral balances only suggests that the govt deficit should remain not large, not necessarily that spending should be kept on trend.
I am not sure I understand Martin's point exactly and I think I need to clarify something with Joshua's point.
ReplyDeleteJoshua - I think you are thinking in terms of MMT, and I didn't mean that. I'm simply talking about maintaining a balance between industrial sectors. People who worry about sustainable patterns of trade (in the way that Arnold Kling discusses) think that the concern is major changes in a previously sustainable production pattern. What I'm saying is that the biggest candidate for that problem right now is government. We all know government can sustain more activity, of course - but it's not.
Daniel,
ReplyDeletelet me re-phrase. Let's say that the economy is in a rut, AD is not where we want it to be, government expenditure is the same, and monetary policy seems to be getting very little traction: how important are patterns of sustainable trade in your view when arguing for more fiscal stimulus in such a situation?
It seems to me that this argument should hold for any change in G. I however only see it proposed now when G falls, but not when it is proposed to raise G.