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Nick Rowe
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Canadian unemployment rate is currently 6.9%. But we measure it differently to the US. It would be lower if we used the US definition. (I saw the exact number recently, and think it was below 6%, but I can't remember exactly.) Our (Conservative) government increased infrastructure investment during the recession. (And gave subsidies to municipalities and universities etc to do the same. My university grabbed the cash and built two new large buildings). Now the recession is mostly over they are tightening up fiscal policy again. It is not obvious (to me) whether we need more or less infrastructure investment. But I think it was obviously right to have done the extra spending we did during the recession. You don't have to be a keynesian to argue you should invest more when real interest rates are very low and builders are cheap.
Toggle Commented Dec 14, 2013 on Links for 12-14-2013 at Economist's View
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Women live longer than men. And if these studies are to be believed, an extra dollar spent on men's health will have a bigger effect than an extra dollar spent on women's health. Both equity and efficiency argue we should therefore spend more on men's health relative to our spending on women's health. Men should go to the front of the line at the doctor's office.
Toggle Commented Dec 14, 2013 on Links for 12-14-2013 at Economist's View
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Andy Harless' post = Samuelson 58 + assets differ in risk. My post = Samuelson 58 + assets differ in liquidity. The two posts are complementary and closely related.
Toggle Commented Dec 14, 2013 on Links for 12-14-2013 at Economist's View
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Chris: "But I'm trying to get at something here - that we're not just products of our genes and/or class, but also of our age." Hang on. There's age, and cohort. And a big multicolinearity problem distinguishing the two. I think you are talking about cohort.
Matt: you missed the point of my post. My title was ironic. And it's got nothing to do with heteroskedasticity of anything. And if money *did* have high(er) utility, that would make it *more* likely inflation would fall.
Toggle Commented Nov 29, 2013 on Links for 11-29-2013 at Economist's View
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YEP! It's working! A big THANKS to whoever did that for me. BTW, the people I really ought to be blaming for all this are the spammers. Why can't some of those teenage hackers do something socially useful for once, like taking down all the spammers?
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Hang on! Something's happened! I think maybe Typepad have whitelisted me, or something! Because I managed to post a comment on Mark Thoma's blog. And now just managed to post one here, under Nick Rowe with a space! (And I think I managed to re-set my Google password! Fingers crossed...
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Testing.
Toggle Commented Nov 4, 2013 on Links for 11-04-2013 at Economist's View
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My thoughts too. It takes a helluva lot of monetary and fiscal profligacy to destroy a currency completely. Robert Mugabe succeeded, but the UK would have to do a helluva lot worse to match his success.
Toggle Commented Oct 22, 2013 on Links for 10-22-2013 at Economist's View
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OK. But the Old Keynesian deep inside me is struggling to get out and yell: "No! It is NOT OK just to assume an eventual return to full employment! We need to understand what, if anything, would lead the economy back to full employment (somehow defined)! There is no more important question in the whole of macro, and it's not one we can duck!" And the policymaker inside me is yelling: "No! Either the New Keynesian model is right, and there really are multiple equilibria, so we get to full employment only if we believe we will get there, in which case we need to start sacrificing some goats fast, on prime time TV, and make sure everyone believes that everyone else believes....that sacrificing goats will work. Or else the New Keynesian model is wrong, and the present and future stock of money really does matter, and it's not just all about interest rates, and we should totally change the way central banks do their work, stop them messing around with useless things like interest rates, and communicate that to the public. And fiscal policy won't work either, unless it's the government buying goats for sacrifice."
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Thanks for the link Brad. But the post on Mark Carney was by my co-blogger at WCI Livio Di Matteo. (Only the monetary policy is not interest rate policy post was mine.)
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Brad: "And come 2008-2009 everything collapsed. Construction collapsed, business investment collapsed--that’s what the spike in interest rates did. ... Then came 2008, which was a John Stuart Millian process: surprising losses in finance, a panic, everybody tries to run and shift their portfolio into something cashlike..." That's the bit where my own (not as good as yours) talk last week to my students fell apart as well. The US (and world) economy was doing fine 2005-2008. What happened in 2008? What caused the surprise? Did the panic cause the drop in expected AD? Or did the expected drop in AD cause the panic? My brain is mush nowadays.
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Ritwik: "What does the LM curve look like in a nominal Y (where Y is the path of nominal GDP rather than level) and real r world?" If we put nominal GDP on the horizontal axis, then if the BoC were targeting NGDP, the LM curve would be vertical, and it would never shift (more strictly, it would shift rightwards at a fixed 5% per year). If the BoC were targeting inflation, then it would still be vertical, but changes in AS would cause the division of PY into P and Y to change, and would cause the LM to shift right or left. You lost me on the 45 degree stuff. K: "1) It's not a problem so long as the system is meta stable by virtue of central bank interest rate policy." Possibly correct. But even then, if the central bank changes the interest rate "target" in response to what happens, it's no longer a target. 2. It doesn't matter how tiny the demand for money is. It is the fact that everything else is bought and sold for the medium of exchange (plus it's the medium of account) that makes money important. 3. If the price of peanuts were perfectly flexible, it would also be always possible to buy or sell money for peanuts. Does that make the price of peanuts the macroeconomically significant price, in addition to the (a) rate of interest?
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Where are all the PK's, Neo-Wicksellians, and MMTers? Should (could?) I have made this post even more provocative?
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Doc Why: I fished it out anyway, to try to train the spam filter not to make mistakes like that.
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I'm stuck in spam! (Feminist spam filter!)
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genauer: mind your manners please. And you are wrong, regardless of whether Simon or I is the one who is right on this. Hi Simon! 1. I think the horizontal LM curve is a fantasy (for any period longer than 6 weeks in Canada). Because the BoC adjusts the overnight rate target every 6 weeks to try to keep the output gap closed and try to keep inflation at the 2% target. A much better approximation to reality would be to draw the LM curve vertical, at that level of Y which the BoC thinks is potential output. Because the Mundell Fleming model (and ISLM too) was designed for short run analysis, and anything less than 6 weeks is very very short run indeed, where the economy can't hope to get anywhere near the IS curve (or even the LM curve, for that matter). 2. Even if you reject my vertical LM model, I think it would be closer to reality to say that central banks in a SOE with PCM choose the real exchange rate, rather than the real interest rate. (Of course, the BoC would never describe itself as doing that, because it would upset the Americans! But we don't have to buy into the same social construction of reality that central banks use to describe what they are doing.) 3. I wouldn't go to the wall on the question of whether the real exchange rate is a random walk or reverts to mean. I can see the merits of your way of doing it. I know it can't be a true random walk, because if it did then its long run variance would be infinite, and PPP wouldn't work any better than a random guess, and PPP does work better than a random guess. But *some* shocks will be permanent. And even if they aren't strictly permanent, it is possible for the shocks to increase over time, at least initially. And even if the shocks do decay over time, the rate of decay might be very slow, relative to the time period over which the MF model is useful, so a random walk might be a good approximation to reality. If I remember the empirical literature (Stephen did a post on this some time back) it is very hard to reject the random walk assumption over any moderate length of data.
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123: I have read reviews of that book. I think it would be too depressing to read. Doctor Why: in answer to your (much) earlier question, about diversified economies and flexible exchange rates. Suppose you had a very diversified economy. There would be less chance of a shock hitting all your sectors at once. And if a shock did hit, and have macro effects, a small change in the real exchange rate might be enough to reallocate demand and resources towards those that survive. If you have only two sectors (banking and tourism) you have a bigger chance that one might get wiped out, and you would need a bigger fall in the real exchange rate to reallocate demand and resources towards the other. That real exchange rate adjustment has to happen somehow, even if you wish you could keep on earning the same old income at the same old real exchange rate. Under fixed exchange rates, the only way it can happen is through deflation, which is slow and painful. Under flexible exchange rates it can happen through exchange rate depreciation, which is fast and not quite so painful.
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genauer: Google is your friend. Giovanni: you lost me a little there. What would your "benchmark" open economy macro model look like, if you were ignoring UIP for simplicity? Vertical BP curve?
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Yep. Bob Smith is stuck in spam, 2 hours ago.
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pcle: saying "the exchange rate is indeterminate" isn't a very good answer to give to a student who asks "what makes the exchange rate go up or down?" Especially since I have already proved to the students, with the help of one international student volunteer, that even Purchasing Power Parity, while not a perfect theory, is a lot better theory than "it's indeterminate". JW: Thanks! But I confess I'm having some second thoughts. Simon's way of teaching it *is* very simple, even though it does make RE implicit. One nice thing about ISLMBP (whether or not we call it "Mundell-Fleming") is that it's very easy to make the BP curve upward-sloping, if we want to relax the small open economy + perfect capital mobility assumption. (Or relax Simon's assumption that the central bank sets the real interest rate).
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JV: agreed. But this comment thread has now been derailed into a discussion about Germany (which perhaps I too should not have joined in). So: no more comments about Germany per se. This post is about monetary theory, exchange controls, and fixed vs flexible exchange rates. BTW, did I leave it too implicit? My "Cunning Plan" was nothing more than the reinvention of flexible exchange rates with national currencies. Or was that sufficiently obvious?
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If the Bank of Canada is targeting 2% inflation, that determines a finite stream of seigniorage revenue, which creates the Bank of Canada's profits, which it gives to the government. That's a couple of billion per year. That will grow over time if the economy grows, but will fall over time if the use of 0% interest currency falls over time. That seigniorage revenue needs to be included in the government budget constraint. It does not mean the government has no budget constraint.
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david: yep. But there are two things that money resolves: trust is the first; getting 3 (or more) people to all meet at once to do a 3-way exchange is the second (the coincidence of wants gets resolved either by money or by all 3 people doing a simultaneous 3-way deal). I wanted to get both of those ideas in.
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