More New-Keynesian Paradoxes
Last calendar week I saw Johannes Wieland's newspaper "Are negative render shocks expansionary at the cypher lower bound?" H5N1 side practice goodness of the task marketplace flavor is that nosotros run into interesting novel papers similar this one, as well as it contributed to my projection of trying to meliorate empathise new-Keynesian models.
Though starting academic papers amongst weblog quotations is usually a bad idea, Johannes starts amongst a bully as well as rattling appropriate one,
Johannes explains
These are but the start of the foreign predictions new-Keynesian models (or modelers) make.
"Fiscal stimulus" is the prediction that fifty-fifty completely wasted authorities spending is proficient for the economy. Paul Krugman recommended, amongst refreshing clarity, that the States authorities imitation an alien invasion as well as so nosotros could pass trillions of dollars edifice useless defenses. (I'm non just certain why he does non telephone telephone for existent defense strength spending. After all, if edifice aircraft carriers saved the economic scheme inwards 1941, as well as defenses against imaginary aliens would relieve the economic scheme inwards 2013, it's non clear why existent aircraft carriers own got the contrary effect. But I'm yet working on the nuances of new-Keynesianism, as well as so I'll allow him explicate the difference. I'm non a big fan of huge defense strength spending anyway.)
Furthermore, all the new-Keynesian models are "Ricardian." They predict the same stimulus whether spending is financed past times borrowing or past times lump-sum taxes today. Good, nosotros don't demand to debate almost "Ricardian equivalence," but to believe their predictions for spending borrowed money, you lot own got to believe that taxing you lot as well as me a trillion dollars as well as spending it on a trillion dollars of alien defenses volition enhance overall output past times 2, 3, or iv (you tin larn genuinely big multipliers inwards these models) trillion dollars.
Actually, stimulus financed past times temporary payroll taxes tin survive fifty-fifty meliorate than from borrowing money. These are a negative render shock, which causes inflation as well as lowers the existent involvement rate. Sand inwards the gears is good. Stimulus financed past times temporary consumption taxes is worse, because that encourages saving. Promises of higher time to come consumption taxes, anathema inwards the criterion sentiment of the world, are good, equally they larn people to eat today.
Super-weirdly, many new-Keyensian paradox predictions larn worse equally the key friction, toll stickiness, gets better.
Johannes over again on the new-Keynesian paradoxes:
So, dorsum to Johannes. He notes that the models predict quite dissimilar behaviour away from the jump than at the bound, as well as so conventional estimates don't genuinely enjoin us that much almost whether these predictions are true. But nosotros own got plenty sense amongst economies at the lower jump now, that nosotros tin laid out to examination but about of these astonishing predictions.
(Minor proposition for PhD students. The key requirement for these predictions is that the Fed does non alter the nominal involvement charge per unit of measurement inwards response to shocks. There own got genuinely been other periods of fourth dimension when key banks own got fixed nominal involvement rates, for illustration betwixt 1945 as well as 1952 inwards the US. More generally, the full general new-Keynesian sentiment is that involvement rates did non response plenty to shocks earlier 1980. So inwards fact, versions of the paradoxes should survive visible inwards information away from the cypher bound.)
Johannes looks at the earthquake inwards Japan, as well as stone oil toll shocks. Surprise, surprise, earthquakes are bad for output. More subtly, the new-Keynesian prediction flows through inflation: "Supply shocks" should enhance expected inflation, which lowers existent involvement rates, as well as lower existent involvement rates should enhance consumption as well as output. (As I explained final week, new-Keynesian models anchor expected consumption inwards the far off future. Then existent involvement rates create upwards one's hear the growth charge per unit of measurement of consumption, as well as higher growth agency a lower grade today. In the models consumption=output. See Johannes' equation 2 page 7.) Johannes finds that the render shocks led to higher expected inflation, as well as thus a lower existent rate. But the lower existent charge per unit of measurement but didn't own got the predicted lawsuit on output. In fact, he finds that stone oil shocks own got worse negative effects on work at the cypher jump than inwards normal times!
Like all provocative empirical work, I'm certain this 1 volition survive picked over. The Booth Macroeconomics workshop did its commons proficient task of exploring nooks as well as crannies. But allow us equally good interruption inwards praise of serious empirical work. Rather than blurt "this is ridicuous!" allow us become run into if indeed earthquakes, hurricanes, labor marketplace restrictions, oligopolization as well as other ordinarily adverse "supply" shocks genuinely aid the economy. The Sun mightiness but come upwards up inwards the West at the cypher bound.
Where to become from here? If I had this bully introduction, as well as results that rather decisively pass upwards a key night-is-day new-Keynesian proposition, clearly linked to all the others, I would plainly own got been tempted to write it upwards equally "this model is wrong," as well as dig deep into which key assumptions of the model drive its basic mistakes. Johannes takes but about other tack, as well as adds credit constraints to the model. Whether this is a successful repair or a clever epicycle I volition exit for but about other fourth dimension -- as well as frankly I haven't studied it closely plenty to opine yet. How many of the paradoxes it overturns is but about other proficient question. It seems to overturn quite a few. But the paradoxes are equally good the sexy policy implications. It may relieve new-Keynesian models from their prediction that hurricanes are good, past times destroying the new-Keynesian multiplier.
Though starting academic papers amongst weblog quotations is usually a bad idea, Johannes starts amongst a bully as well as rattling appropriate one,
As but about of us proceed trying to signal out, the USA is inwards a liquidity trap: [...] This puts us inwards a populace of topsy-turvy, inwards which many of the commons rules of economic science cease to hold. Thrift leads to lower investment; wage cuts trim down employment; fifty-fifty higher productivity tin survive a bad thing. And the broken windows fallacy ceases to survive a fallacy: something that forces firms to supplant capital, fifty-fifty if that something seemingly makes them poorer, tin cause spending as well as enhance employment.” -Paul KrugmanI endorse this quote, because it is an accurate as well as pithy description of the properties of many careful new-Keynesian analyses inwards the academic literature.
Johannes explains
Does destroying productive capacity enhance output when the cypher lower jump (ZLB) binds? [ZLB: When involvement rates are zero, the Fed can't lower them whatsoever to a greater extent than inwards response to shocks -JC] While this query may seem absurd, inwards fact it is a mutual prediction of many macroeconomic models: In these models, temporary negative render shocks enhance inflation expectations as well as lower expected existent involvement rates at the ZLB, which stimulates consumption as well as output. While but about prominent economists own got subscribed to this sentiment as well as its policy implications (e.g., Eggertsson as well as Woodford [2003], Eggertsson as well as Krugman [2011], Eggertsson [2012]), at that spot is broad disagreement over such a radical as well as unintuitive proposition.Indeed at that spot is.
These are but the start of the foreign predictions new-Keynesian models (or modelers) make.
"Fiscal stimulus" is the prediction that fifty-fifty completely wasted authorities spending is proficient for the economy. Paul Krugman recommended, amongst refreshing clarity, that the States authorities imitation an alien invasion as well as so nosotros could pass trillions of dollars edifice useless defenses. (I'm non just certain why he does non telephone telephone for existent defense strength spending. After all, if edifice aircraft carriers saved the economic scheme inwards 1941, as well as defenses against imaginary aliens would relieve the economic scheme inwards 2013, it's non clear why existent aircraft carriers own got the contrary effect. But I'm yet working on the nuances of new-Keynesianism, as well as so I'll allow him explicate the difference. I'm non a big fan of huge defense strength spending anyway.)
Furthermore, all the new-Keynesian models are "Ricardian." They predict the same stimulus whether spending is financed past times borrowing or past times lump-sum taxes today. Good, nosotros don't demand to debate almost "Ricardian equivalence," but to believe their predictions for spending borrowed money, you lot own got to believe that taxing you lot as well as me a trillion dollars as well as spending it on a trillion dollars of alien defenses volition enhance overall output past times 2, 3, or iv (you tin larn genuinely big multipliers inwards these models) trillion dollars.
Actually, stimulus financed past times temporary payroll taxes tin survive fifty-fifty meliorate than from borrowing money. These are a negative render shock, which causes inflation as well as lowers the existent involvement rate. Sand inwards the gears is good. Stimulus financed past times temporary consumption taxes is worse, because that encourages saving. Promises of higher time to come consumption taxes, anathema inwards the criterion sentiment of the world, are good, equally they larn people to eat today.
Super-weirdly, many new-Keyensian paradox predictions larn worse equally the key friction, toll stickiness, gets better.
Johannes over again on the new-Keynesian paradoxes:
First, according to the “Paradox of Thrift,” a ascension inwards the wishing to relieve is self-defeating at the ZLB, because it reduces output as well as so much that aggregate savings autumn (Keynes [1936], Krugman [1998], Eggertsson as well as Woodford [2003], as well as Christiano [2004]). Second, according to the “Paradox of Flexibility,” output volatility may ascension at the ZLB when prices as well as reward are to a greater extent than flexible (e.g., Werning [2011], Eggertsson as well as Krugman [2011]).
My empirical results draw of piece of work organization primarily the “Paradox of Toil” (Eggertsson [2010]), whereby a temporary growth inwards desired labor render at the ZLB reduces the equilibrium work grade inwards criterion models. .... Following this logic, payroll revenue enhancement cuts are contractionary at the ZLB because they lower expected inflation (Eggertsson [2011]), as well as allowing collusion amidst firms is expansionary because it raises expected inflation (Eggertsson [2012]).H5N1 interruption inwards praise of economical models: They necktie ideas together. You can't option as well as choose. If you lot similar stimulus amongst borrowed money, but suspect that tax-financed stimulus mightiness non operate as well as so well, you lot can't but waive your hands as well as refer to new-Keynesian models to defend you. These models predict the 2 policies own got the same effect. If you lot similar your stimulus, but retrieve that perchance hurricanes wiping out a bunch of the working capital alphabetic lineament stock isn't great, sorry, you lot can't refer to new-Keynesian models to defend you. If you lot don't purchase one of Krugman's assertions, you lot don't purchase any of them. (At a minimum, you lot own got to create a novel variant of model -- you lot can't refer to existing new-Keynesian models to defend you.) To gustation fish, you lot own got to swallow the whole whale, hook, line, as well as sinker.
So, dorsum to Johannes. He notes that the models predict quite dissimilar behaviour away from the jump than at the bound, as well as so conventional estimates don't genuinely enjoin us that much almost whether these predictions are true. But nosotros own got plenty sense amongst economies at the lower jump now, that nosotros tin laid out to examination but about of these astonishing predictions.
(Minor proposition for PhD students. The key requirement for these predictions is that the Fed does non alter the nominal involvement charge per unit of measurement inwards response to shocks. There own got genuinely been other periods of fourth dimension when key banks own got fixed nominal involvement rates, for illustration betwixt 1945 as well as 1952 inwards the US. More generally, the full general new-Keynesian sentiment is that involvement rates did non response plenty to shocks earlier 1980. So inwards fact, versions of the paradoxes should survive visible inwards information away from the cypher bound.)
Johannes looks at the earthquake inwards Japan, as well as stone oil toll shocks. Surprise, surprise, earthquakes are bad for output. More subtly, the new-Keynesian prediction flows through inflation: "Supply shocks" should enhance expected inflation, which lowers existent involvement rates, as well as lower existent involvement rates should enhance consumption as well as output. (As I explained final week, new-Keynesian models anchor expected consumption inwards the far off future. Then existent involvement rates create upwards one's hear the growth charge per unit of measurement of consumption, as well as higher growth agency a lower grade today. In the models consumption=output. See Johannes' equation 2 page 7.) Johannes finds that the render shocks led to higher expected inflation, as well as thus a lower existent rate. But the lower existent charge per unit of measurement but didn't own got the predicted lawsuit on output. In fact, he finds that stone oil shocks own got worse negative effects on work at the cypher jump than inwards normal times!
Like all provocative empirical work, I'm certain this 1 volition survive picked over. The Booth Macroeconomics workshop did its commons proficient task of exploring nooks as well as crannies. But allow us equally good interruption inwards praise of serious empirical work. Rather than blurt "this is ridicuous!" allow us become run into if indeed earthquakes, hurricanes, labor marketplace restrictions, oligopolization as well as other ordinarily adverse "supply" shocks genuinely aid the economy. The Sun mightiness but come upwards up inwards the West at the cypher bound.
Where to become from here? If I had this bully introduction, as well as results that rather decisively pass upwards a key night-is-day new-Keynesian proposition, clearly linked to all the others, I would plainly own got been tempted to write it upwards equally "this model is wrong," as well as dig deep into which key assumptions of the model drive its basic mistakes. Johannes takes but about other tack, as well as adds credit constraints to the model. Whether this is a successful repair or a clever epicycle I volition exit for but about other fourth dimension -- as well as frankly I haven't studied it closely plenty to opine yet. How many of the paradoxes it overturns is but about other proficient question. It seems to overturn quite a few. But the paradoxes are equally good the sexy policy implications. It may relieve new-Keynesian models from their prediction that hurricanes are good, past times destroying the new-Keynesian multiplier.
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