Dunno. I'm old enough to remember the 1970's, and to remember that oil price shocks, and lots of other non-monetary explanations, were close to being received opinion on the causes of inflation. But for the last 25 years, the Bank of Canada (for example) has used monetary policy to keep inflation mostly between 1% and 3%, despite all sorts of oil price, fiscal, and other shocks. And it's not even trying to stabilise headline inflation precisely at 2% in the face of those supply shocks. *Any* shock *can* cause inflation, with the "right" (i.e. mostly wrong) monetary policy regime. E.g. if the central bank had an apple price target, a bumper apple harvest would cause inflation.

I tried to read Great Transformation as a grad student, trying to get some sense of critiques and alternatives to the standard economic approaches. Gave up after a couple of chapters. Far too unclear and far too long. Then I read a short clear article saying that peasants are rational economic decision-makers and therefore Polanyi was all wrong. And I really couldn't tell whether that did or did not contradict what Polanyi was saying.

Thanks! I think I would start with Fisher (with M fixed), then go on to Wicksell by making M endogenous. A Wicksellian central bank offers an unlimited amount of loans of M at an interest rate r, and the AD curve either becomes vertical (for a downward-sloping IS), or becomes very thick (for a horizontal IS).

Well, for one thing, I=S is a bad place to start doing macro because it leads even very smart and competent people like Philip Cross to get muddled! But there are other reasons too. I give some in my old post that is linked in this post.

Damn. Gotta be careful using > Trying again: Keynesian macro assumes Ys > Y = Yd (except at full employment, where Ys=Y=Yd)

Instead of the ex ante ex post distinction, I prefer to think of it this way: Think of the market for apples, in micro. There are 3 quantities: Qd (quantity buyers want to buy); Qs (quantity sellers want to sell); and Q (actual quantity bought-and-sold). And if exchange is voluntary, so Q=min{Qs,Qd}, then either Q=Qs or Q=Qd, so we are down to 2 quantities being different. Keynesian macro assumes Ys

Yes it's backwards. Just a typo.

It was a typo. Swap "high" with "low".

Consider a more general model, in which (unlike the NK model) agents are not identical (so their expenditures and receipts of money are not perfectly synchronised willy nilly), and each agent has a chequing account at the central bank. At any point in time, some agents will have a positive balance, and some a negative balance (overdraft). Define "gross money stock" as positive plus negative balances. Define "net money stock" as positive minus negative balances. (Both are zero in the NK model). The central bank has 4 monetary policy instruments: 1. Open market operations, which change the net money stock. 2. Overdraft limits/colateral constraints, which change the gross money stock. 3. Interest paid on positive balances, which changes net money demand. 4. The interest spread (or premium) charged on negative balances, which changes gross money demand. This is roughly how central banks (like the Bank of Canada) can conduct monetary policy, except they only allow commercial banks, not the general public, to hold chequing accounts at the central bank. I *think* this might be the way to integrate the NK perspective with the ISLM perspective.

One useful thing we didn't know in 1978 was how to do sticky-price macro properly with monopolistically competititive firms. NK macro deserves credit for figuring that out, in the late 1980's.

Hard to answer a question about what people thought would happen in circumstances ZLB, if they hadn't thought about it much (if at all). I think if you had asked me this in 2007, I would have answered: a mix of 2 and 4. [1 is problematic, because by assumption you can't follow 1. Also, for the Bank of Canada at least, they weren't strictly following a Taylor Rule, but looking at everything to target their internal forecast of inflation to 2% at an 18 month horizon.]

The Cuban government did seem rather good at finding a sequence of patrons willing to give or lend it money.

Played with pencil and paper. What I said above seems wrong; and what I wrote in my original post seems right. It seems it could go either way. Given strategic complementarities, it seems a priori equally likely there could be positive or negative externalities, at the margin, in equilibrium.

Thanks Brad. "But is there reason to think that such situations are in any sense typical in the case of human agglomeration?" Hmmm. Yes, I think there is. But I can only offer a geometric "proof" of my intuition (at least, I think I can). Unless you rig the indifference curves, I think the general case is that you end up with a PD, at the margin. I'm not sure though. Need to play with pencil and paper.

anne: in my defence, I wrote that post (mostly) for finance people. And finance people will be very familiar with the particular math I do there (more familiar than I am). I was speaking the language they understand best (or trying to).

Thanks Brad. By the way, this was my way of modelling what Morgan Ricks was saying in his book.

Suppose you had an account at the "bank", in which you held shares in that same "bank". Like holding shares in a mutual fund. Is it really obvious you wouldn't be able to write checks on that account? (In the olden days the technology wouldn't be able to handle the frequent changes in the nominal value of your account balance whenever the share price changed, but nowadays?)

My theory: "Political economy" means "as opposed to domestic economy; the management of the resources of the polis not the domos". So "political" is now redundant. Am I right?

"And as production falls businesses stop paying the workers they have laid off: incomes fall." I think it is best to delete that bit. Because income from production of goods would fall when production falls, whether or not businesses stop paying the workers they have laid off, and whether or not they lay workers off or keep them idle on the payroll. The only difference that makes is to the distribution of income. Capitalists' profits are people's incomes too. "They decide that they want to spend less and so build up their holdings of financial assets." And we could have another round of our old argument about "financial assets" vs "medium of exchange". Maybe they want to build up their holdings of land? What matters is that they spend less medium of exchange to build up (at least temporarily) their holdings of medium of exchange.

I Googled "dispositive", but it didn't help. Fair enough, but a much more useful way to create accountability would be to replace inflation targeting with price level path (or NGDP level path) targeting. The Fed knows in advance it will be required to fix its past "mistakes". Bygones will not be allowed to be bygones. Permahawks (plus permadoves too, by symmetry) will become an endangered species.

I agree with John and Scott. How can you (easily) explain (e.g.) why supply curves slope up without using a (curved) PPF?

Thanks Brad. kaleberg: the math in my little model can be solved by a bright high school student. That is not the issue. It is understanding what it means that is the issue. It was math/physics/engineer people who took the equations and dumped them into a computer without thinking about it that got us economists into this mess in the first place. What we need are philosophers with common sense. Economics is about people, with expectations, interacting with other people.

anne: I wrote a post on it, which I think explains it a bit more simply (though at much greater length): http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/07/understanding-schmidt-and-woodford-on-neo-fisherianism.html

Tom: interesting. But let's take a simple example. Suppose each agent i has a reaction function Y(i) = 2Y + e(i) where Y is mean Y(i) across all agents and e(i) is a mean zero iid shock. Large number of agents, simultaneous moves. There's a unique RE equilibrium Y=0, but it's not learnable by least squares. So you are saying that agents will learn that least squares is not a good learning method, and figure out that they must be living in a model with an "unstable" equilibrium, and all jump to it. But here's another possibility. There are always bounds out there, somewhere. Like hyperinflation of hyperdeflation eventually make people give up on using money and resort to barter, or a different money (like Zimbabwe). Suppose agents' actions are bounded in my simple model. Like -100 <= Y(i) <= +100. That now gives us three RE equilibria, and the outer two equilibria are learnable by least squares. So if we start near the Y=0 equilibria, with least squares learning, and agents eventually figure out that least squares isn't working, it seems far more likely they will jump to the nearest outer equilibrium, since they see that's where they are going anyway. In other words, the passengers are far more likely to see that the boat is unstable, is going to capsize, and all jump off the boat, than all line up carefully along the exact centre of the boat. That's the reason that armies and navies spend so much time on drills and discipline, precisely to stop everyone rushing for the sides of the boat.

Yep. Good. Good to see Peter Howitt's early work getting recognition too. Slid over one point though. The Garcia-Schmidt/Woodford approach isn't really real-time learning like the Evans approach is. It's more like a Walrasian Tatonnement for expectations. Play doesn't begin until the auctioneer says "OK, that's enough iterations on expectations, I'm bored, let's start trading."