Monetary Impotence Inwards Context

Mainly for macroeconomists

There are a pregnant grouping of people who retrieve that monetary policy must last the correct respond fifty-fifty inwards a liquidity trap post yesterday is thence critical. It is laid upwards inwards an idealised ii menstruation Blue Planet where Ricardian Equivalence holds, but that is exclusively appropriate for the chore inwards hand. If people believe something because of (in their view) basic theory, as well as y'all retrieve they are incorrect inwards terms of basic theory, thence that is the degree on which to argue.

The declaration is that inwards a liquidity trap, when prices are sticky, temporarily expanding the coin render - even if it involves helicopter money (i.e. coin financed taxation cuts) - volition non exercise anything to instruct y'all out of the trap. Another, as well as to a greater extent than modern, way of proverb the coin render increment is temporary is proverb that the inflation target is unchanged, thence the long run cost degree is unchanged. (Long run coin neutrality does concur inwards this world.) I volition non become through Paul’s declaration inwards item - I bring gone through the same logic because of the centrality of coin inwards macroeconomics, as well as because of ‘basic’ ideas similar coin neutrality. Call them marketplace monetarists if y'all like. They dislike financial stimulus because - inwards their thought - it only has to last bit best, or a fudge, compared to monetary policy. Their thought is non ideological, but essentially based on macro theory. Now it may non last really relevant to the existent world, but for many asset the theoretical high dry soil is important, because it colours their thought of the existent world.

That is the grouping that Paul Krugman has been controversy alongside recently, as well as why the betoken he made inwards his post yesterday is thence critical. It is laid upwards inwards an idealised ii menstruation Blue Planet where Ricardian Equivalence holds, but that is exclusively appropriate for the chore inwards hand. If people believe something because of (in their view) basic theory, as well as y'all retrieve they are incorrect inwards terms of basic theory, thence that is the degree on which to argue.

The declaration is that inwards a liquidity trap, when prices are sticky, temporarily expanding the coin render - even if it involves helicopter money (i.e. coin financed taxation cuts) - volition non exercise anything to instruct y'all out of the trap. Another, as well as to a greater extent than modern, way of proverb the coin render increment is temporary is proverb that the inflation target is unchanged, thence the long run cost degree is unchanged. (Long run coin neutrality does concur inwards this world.) I volition non become through Paul’s declaration inwards item - I bring gone through the same logic before. The basic betoken is that the temporary increment inwards coin is saved, non spent, because agents know it is temporary. Short run coin neutrality does non hold, as well as non because prices are sticky, but because of Ricardian Equivalence.

It is precisely the same ground why the Pigou termination is no longer discussed. Ricardian Equivalence post yesterday is thence critical. It is laid upwards inwards an idealised ii menstruation Blue Planet where Ricardian Equivalence holds, but that is exclusively appropriate for the chore inwards hand. If people believe something because of (in their view) basic theory, as well as y'all retrieve they are incorrect inwards terms of basic theory, thence that is the degree on which to argue.

The declaration is that inwards a liquidity trap, when prices are sticky, temporarily expanding the coin render - even if it involves helicopter money (i.e. coin financed taxation cuts) - volition non exercise anything to instruct y'all out of the trap. Another, as well as to a greater extent than modern, way of proverb the coin render increment is temporary is proverb that the inflation target is unchanged, thence the long run cost degree is unchanged. (Long run coin neutrality does concur inwards this world.) I volition non become through Paul’s declaration inwards item - I bring gone through the same logic killed the Pigou termination every bit a fundamental theoretical idea. If the inflation target is unchanged, when prices autumn today the futurity cost degree must autumn pari passu, reducing the futurity nominal stock of money. There is no wealth effect. As I noted post yesterday is thence critical. It is laid upwards inwards an idealised ii menstruation Blue Planet where Ricardian Equivalence holds, but that is exclusively appropriate for the chore inwards hand. If people believe something because of (in their view) basic theory, as well as y'all retrieve they are incorrect inwards terms of basic theory, thence that is the degree on which to argue.

The declaration is that inwards a liquidity trap, when prices are sticky, temporarily expanding the coin render - even if it involves helicopter money (i.e. coin financed taxation cuts) - volition non exercise anything to instruct y'all out of the trap. Another, as well as to a greater extent than modern, way of proverb the coin render increment is temporary is proverb that the inflation target is unchanged, thence the long run cost degree is unchanged. (Long run coin neutrality does concur inwards this world.) I volition non become through Paul’s declaration inwards item - I bring gone through the same logic here, fifty-fifty allowing coin to last especial inwards non beingness redeemable does non instruct the Pigou termination back, because alongside irredeemable coin whatever wealth termination comes from the long run stock of money.

Money is non a hot spud inwards this world. The spud has gone mutual frigidity because of the liquidity trap, as well as the coin is happily saved to pay the futurity taxation increases that volition last required to continue the long run coin stock (and cost level) constant. 

While inwards this largely frictionless Blue Planet coin is impotent, additional authorities spending is a foolproof way of expanding demand. So is raising the long run cost level, which agency at roughly betoken raising the inflation target.

All I actually wanted to exercise inwards this postal service was brand an observation. The theoretical betoken that Paul makes depends crucially on thinking inwards an intertemporal manner, which gives y'all Ricardian Equivalence. Just every bit cost rigidity kills brusk run monetary neutrality, thence does Ricardian Equivalence inwards an inflation targeting liquidity trap world. So hither is modern microfounded macroeconomic theory providing back upwards to increasing authorities spending rather than monetary policy inwards a liquidity trap. Modern theory is non inherently anti-Keynesian. .