New Keynesian Stimulus
One slice of interesting economic science did come upward up spell I was looking through the stimulus blogwars.
Paul Krugman pointed to New Keynesian stimulus models inwards a recent post, When Some Rigor Helps.
I wrote a newspaper most New Keynesian models, published inwards the Journal of Political Economy (appendix, on JSTOR). I haven't totally digested the NK stimulus literature -- In add-on to Mike's paper, Christiano, Eichenbaum in addition to Rebelo; Gauti Eggertsson; Leeper Traum in addition to Walker; Cogan, Cwik, Taylor, in addition to Wieland are on my reading listing -- exactly I've gotten far plenty to receive got some abrupt questions worth passing on inwards a weblog post.
Krugman continues,
One affair I know for sure: This is wrong. (It's an understandable mistake, in addition to many people brand it.) The New Keynesian models are radically dissimilar from Old-Keynesian ISLM models. They are non a magic wand that lets yous quiet Lucas in addition to Sargent in addition to locomote dorsum to the practiced erstwhile days.
New-Keynesian models receive got multiple equilibria. The model's responses -- such every bit the reply of output to regime spending or to monetary policy shocks -- are non controlled past times need and supply. They occur past times cajoling the economic scheme to boundary to a dissimilar i of many possible equilibria. If you're going to write an honest op-ed most New Keynesian models, yous genuinely receive got to enjoin "government spending volition brand the economic scheme boundary from i equilibrium to another." Good luck!
New Keynesian models offering a fundamentally dissimilar machinery from the IS-LM or standard stories that Krugman -- in addition to Bernanke, in addition to lots of sensible people who mean value most policy -- notice "actually to a greater extent than useful."
For example, the common-sense even out for inflation command via the Taylor dominion is this: Inflation rises 1%, the Fed raises rates 1.5% in addition to hence existent rates ascent 0.5%, "demand" falls, in addition to inflation subsides. In a new-Keynesian model, past times contrast, if inflation rises 1%, the Fed engineers a hyperinflation where inflation volition ascent to a greater extent than in addition to more! Not liking this threat, the soul sector jumps to an option equilibrium inwards which inflation doesn't ascent inwards the showtime place. New Keynesian models endeavour to accomplish "determinacy" -- direct i of many equilibria -- past times supposing that the Fed deliberately introduces "instability" (eigenvalues greater than i inwards organisation dynamics). Good luck explaining that honestly!
In the context of the cipher boundary in addition to multipliers, non fifty-fifty this machinery tin transportation away work, because the involvement charge per unit of measurement is stuck at zero. There are "multiple locally-bounded equilibria." Some stimulus models select equilbria past times supposing that for whatsoever exactly the chosen one, people await that the Fed volition l hyperinflate many years inwards the hereafter i time the cipher boundary is lifted. Hmmm.
These problems tin transportation away hold upward fixed, in addition to my newspaper shows how. Alas, the ready completely changes the model dynamics in addition to predictions for the economy's reaction to shocks.
Or perchance not. I know the unproblematic New Keynesian models endure these problems. (That's what the JPE newspaper is about.) Do they apply to the stimulus models? I don't know yet. I sure as shooting receive got some abrupt questions to ask, in addition to I don't come across anything inwards the models I've looked at alongside a promise of solving these problems.
Moreover, fifty-fifty taken at confront value, the predictions of New Keynesian models are a lot dissimilar from Krugman's promotion that to a greater extent than G gives to a greater extent than Y.
Every NK stimulus model that I receive got read is "Ricardian." Government spending has real large effects, even if it is financed past times electrical current taxes. Good luck writing an op-ed that says, "The regime should direct care of a trillion of novel taxes this twelvemonth in addition to pass it. We'll all hold upward a trillion in addition to a one-half improve off past times Christmas." The pop appeal of stimulus comes from the persuasion that borrowed coin doesn't transparently trim back need every bit much every bit taxed money. But that's the atomic issue 26 dependent patch of models -- yous can't receive got i prediction without the other. If yous don't believe inwards taxed stimulus, yous can't work a Ricardian New Keynesian model to defend borrowed stimulus. (Or yous receive got to build i inwards which at that spot is a large difference, which I receive got non constitute in addition to hence far.)
More weird stuff, from Gauti Eggertsson's introduction
I too notice that "deflationary spirals" are a large purpose of the analysis. For example, inwards Christiano et al.,
Back to reading. I'll transportation over again if I larn to a greater extent than NK stimulus insights. It may receive got a while. I even in addition to hence mean value it's yesterday's news. Sovereign default seems to a greater extent than of import for the future.
Paul Krugman pointed to New Keynesian stimulus models inwards a recent post, When Some Rigor Helps.
But receive got an NK [New-Keynesian] model similar Mike Woodford’s (pdf) — a model inwards which everyone maximizes given a budget constraint, inwards which past times structure all the accounting identities are honored, in addition to inwards which it is assumed that everyone perfectly anticipates hereafter taxes in addition to all that— in addition to yous notice straight off that a temporary ascent inwards G produces a ascent inwards Y"...As it happens, I've spent a lot of fourth dimension reading in addition to pedagogy New Keynesian models.
So I gauge I’d urge all the people at nowadays engaging inwards contorted debates most what S=I does in addition to does non imply to read Mike first, in addition to come across whether yous receive got whatsoever betoken left.
I wrote a newspaper most New Keynesian models, published inwards the Journal of Political Economy (appendix, on JSTOR). I haven't totally digested the NK stimulus literature -- In add-on to Mike's paper, Christiano, Eichenbaum in addition to Rebelo; Gauti Eggertsson; Leeper Traum in addition to Walker; Cogan, Cwik, Taylor, in addition to Wieland are on my reading listing -- exactly I've gotten far plenty to receive got some abrupt questions worth passing on inwards a weblog post.
Krugman continues,
That doesn’t hateful that yous receive got to work Mike’s model or something similar it every fourth dimension yous mean value most policy; past times in addition to large, advertizing hoc models similar IS-LM are genuinely to a greater extent than useful, inwards my judgment
One affair I know for sure: This is wrong. (It's an understandable mistake, in addition to many people brand it.) The New Keynesian models are radically dissimilar from Old-Keynesian ISLM models. They are non a magic wand that lets yous quiet Lucas in addition to Sargent in addition to locomote dorsum to the practiced erstwhile days.
New-Keynesian models receive got multiple equilibria. The model's responses -- such every bit the reply of output to regime spending or to monetary policy shocks -- are non controlled past times need and supply. They occur past times cajoling the economic scheme to boundary to a dissimilar i of many possible equilibria. If you're going to write an honest op-ed most New Keynesian models, yous genuinely receive got to enjoin "government spending volition brand the economic scheme boundary from i equilibrium to another." Good luck!
New Keynesian models offering a fundamentally dissimilar machinery from the IS-LM or standard stories that Krugman -- in addition to Bernanke, in addition to lots of sensible people who mean value most policy -- notice "actually to a greater extent than useful."
For example, the common-sense even out for inflation command via the Taylor dominion is this: Inflation rises 1%, the Fed raises rates 1.5% in addition to hence existent rates ascent 0.5%, "demand" falls, in addition to inflation subsides. In a new-Keynesian model, past times contrast, if inflation rises 1%, the Fed engineers a hyperinflation where inflation volition ascent to a greater extent than in addition to more! Not liking this threat, the soul sector jumps to an option equilibrium inwards which inflation doesn't ascent inwards the showtime place. New Keynesian models endeavour to accomplish "determinacy" -- direct i of many equilibria -- past times supposing that the Fed deliberately introduces "instability" (eigenvalues greater than i inwards organisation dynamics). Good luck explaining that honestly!
In the context of the cipher boundary in addition to multipliers, non fifty-fifty this machinery tin transportation away work, because the involvement charge per unit of measurement is stuck at zero. There are "multiple locally-bounded equilibria." Some stimulus models select equilbria past times supposing that for whatsoever exactly the chosen one, people await that the Fed volition l hyperinflate many years inwards the hereafter i time the cipher boundary is lifted. Hmmm.
These problems tin transportation away hold upward fixed, in addition to my newspaper shows how. Alas, the ready completely changes the model dynamics in addition to predictions for the economy's reaction to shocks.
Or perchance not. I know the unproblematic New Keynesian models endure these problems. (That's what the JPE newspaper is about.) Do they apply to the stimulus models? I don't know yet. I sure as shooting receive got some abrupt questions to ask, in addition to I don't come across anything inwards the models I've looked at alongside a promise of solving these problems.
Moreover, fifty-fifty taken at confront value, the predictions of New Keynesian models are a lot dissimilar from Krugman's promotion that to a greater extent than G gives to a greater extent than Y.
Every NK stimulus model that I receive got read is "Ricardian." Government spending has real large effects, even if it is financed past times electrical current taxes. Good luck writing an op-ed that says, "The regime should direct care of a trillion of novel taxes this twelvemonth in addition to pass it. We'll all hold upward a trillion in addition to a one-half improve off past times Christmas." The pop appeal of stimulus comes from the persuasion that borrowed coin doesn't transparently trim back need every bit much every bit taxed money. But that's the atomic issue 26 dependent patch of models -- yous can't receive got i prediction without the other. If yous don't believe inwards taxed stimulus, yous can't work a Ricardian New Keynesian model to defend borrowed stimulus. (Or yous receive got to build i inwards which at that spot is a large difference, which I receive got non constitute in addition to hence far.)
More weird stuff, from Gauti Eggertsson's introduction
Cutting taxes on undertaking or majuscule is contractionary nether the exceptional circumstances the the U.S. of A. is experiencing today. Meanwhile, the resultant of temporarily increasing regime spending is large, much larger than nether normal circumstances. Similarly, some other forms of taxation cuts, such every bit a reduction inwards sales taxes in addition to investment taxation credits, every bit suggested, for example, past times Feldstein (2002) inwards the context of Japan’s “Great Recession,” are extremely effective....Tax cuts are contractionary? The stimulus failed because the large taxation cutting part dragged output down? That's new, in addition to I didn't listen Krugman complaining! Maybe it's right, exactly yous tin transportation away come across we're a long long agency from unproblematic ISLM logic. Also, it's clear that these models brand a abrupt distinction betwixt cipher in addition to nonzero rates, that stimulus advocates sure as shooting do non make.
At positive involvement rates, a undertaking taxation cutting is expansionary, every bit the literature has emphasized inwards the past. But at cipher involvement rates, it flips signs in addition to taxation cuts larn contractionary. Similarly spell majuscule taxation cuts are almost irrelevant inwards the model at a positive involvement charge per unit of measurement (up to the minute decimal point) they larn strongly negative at zero. Meanwhile, the multiplier of regime spending non exclusively stays positive at cipher involvement rates exactly becomes almost 5 times larger.
I too notice that "deflationary spirals" are a large purpose of the analysis. For example, inwards Christiano et al.,
But, inwards contrast to the textbook scenario, the zero-bound scenario studied inwards the modern literature involves a deflationary spiral which contributes to in addition to accompanies the large autumn inwards output.OK, exactly nosotros receive got nigh cipher short-term regime rates, a 3% positive charge per unit of measurement of inflation in addition to far from cipher corporate in addition to long term rates. Does the analysis apply?
Back to reading. I'll transportation over again if I larn to a greater extent than NK stimulus insights. It may receive got a while. I even in addition to hence mean value it's yesterday's news. Sovereign default seems to a greater extent than of import for the future.
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