Comments on: Krugman vs. Eggertsson

By: TheMoneyIllusion » Comparing the Great Contraction and the Great Recession (1932, pt 5 of 5)

Fri, 02 Apr 2010 21:33:59 +0000

[...] monetary policy (the Swedish kroner depreciation that Yglesias mentioned.) In contrast, Krugman has argued that lower unemployment benefits and reduced labor costs may reduce AD. And those effects [...]

By: The Failure of Modern Macroeconomics « The Everyday Economist

The Failure of Modern Macroeconomics « The Everyday Economist — Tue, 16 Mar 2010 04:34:48 +0000

[...] argue that it suggests that liquidity traps don’t exist. Put differently, as Scott Sumner has suggested: Zero rates don’t really make monetary policy more difficult, they make interest rate-oriented [...]

By: ssumner

ssumner — Mon, 21 Dec 2009 21:44:31 +0000

Felix, I basically agree, although once again I think the inflation target needs to be even further above optimal under a memoryless inflation target, than under a price level target.

By: Felix

Felix — Sat, 19 Dec 2009 20:41:42 +0000

You said:
“But I think the so-called time inconsistency problem is overrated. Central banks care a lot about their reputation. They don’t like to break promises. That is why they are reluctant to set specific goals.”

I don’t think that central banks being incredible is a problem, either. But in order to make a sensible commitment, central bankers first have to understand the problem. Central bankers today understand that it is generally important to promise to keep inflation low. But they don’t understand that, in a ZLB situation, it is optimal to promise (and deliver, because you can’t permanently fool the market) higher-than-optimal inflation.

By: ssumner

ssumner — Sat, 19 Dec 2009 20:10:16 +0000

Felix, Good point, and my new post replying to Ambrosini may help explain my views here.

But if you are good at economics (which you seem to be) you might be better off reading Woodford’s recent defense of level targeting, as he is a more competent theorist than I am.

The intuition is that you need level targeting, or what I call a nominal trajectory, or nominal target path. If you do a “memory-less” inflation targeting, then I think there may be exactly the problems you describe.

But I think the so-called time inconsistency problem is overrated. Central banks care a lot about their reputation. They don’t like to break promises. That is why they are reluctant to set specific goals.

By: Felix

Felix — Sat, 19 Dec 2009 17:36:42 +0000

ssumner said:
“Zero rates don’t really make monetary policy more difficult, they make interest rate-oriented monetary policy more difficult. That’s what the “What bugs me” line was all about. Permanent QE is just as effective as ever. Exchange rate depreciation is just as effective as ever, inflation targeting is just as effective as ever, NGDP targeting is just as effective as ever, commodity price targeting is just as effective as ever.”

The real conflict at the zero lower bound is discretionary vs. time-consistent optimization. Suppose zero inflation is optimal. Then, when you are in the ZLB, you want to create higher expected inflation in order to end the ZLB. Once you are out, you want lower inflation.

Monetary policy at the ZLB is more difficult because policymakers have to be aware of the conflict and be able to credibly commit to time-consistent optimization. At the ZLB, all policies that approximate time-consistency (like a level target) or that make it costly for the monetary authority to abolish its prior commitment (such as buying inflation linked bonds, which lose value upon lower inflation) can be helpful, while those that don’t (such as inflation-rate targeting) fail.

If commitment to set future short-term interest rates is possible, then working with the interest rate in a ZLB is effective.

By: ssumner

ssumner — Fri, 18 Dec 2009 15:24:50 +0000

Doc Merlin, Those are good points about saving. I answered the CPI question in the other thread.

By: Doc Merlin

Doc Merlin — Thu, 17 Dec 2009 22:00:59 +0000

DOH! I posted to the wrong, thread, this was supposed to go in the universe deflation thread.
*Goes to post there.*

By: Doc Merlin

Doc Merlin — Thu, 17 Dec 2009 21:56:23 +0000

On a non-physics point:
This year we haven’t really had price deflation. That was the second half of last year. This year, CPIAUNCS has been growing pretty much the whole year, and PPI has been mostly growing since March.

CPI is now about 3% above what it was at the start of the recession, and PPI is almost at the level it was at the start of the recession.
Here is the plot:

http://picasaweb.google.com/lh/photo/KhkqgfKdkHsxO73B3AL93w?authkey=Gv1sRgCOSj8aqKqty4lwE&feat=directlink

By: Doc Merlin

Doc Merlin — Thu, 17 Dec 2009 17:14:49 +0000

1. It really depends on how you define “savings.” If you mean a 401k or a pension plan, then yes most americans don’t have one.
This study talks about participation rates in employer provided plans, which is roughly 55% for salaried, full-time workers.
http://www.ebri.org/pdf/briefspdf/EBRI_IB_11-2009_No336_Ret-Part.pdf

If you mean paying down a mortgage as “saving” then yes a lot of americans have savings outside of DD. Oddly enough, mortgaging one’s home is an extremely common way to startup a small business.

2. I said DD’s and defined them to include any account that was available on demand, including savings accounts, checking accounts, and money market accounts.

3. Savings rate has been correlated to culturally be inversely proportional to that culture’s recent wealth. De Soto casually mentions in his book “The Mystery of Capital” that third world countries have a very, very high savings rate, and lots of money. What they lack is access to formal markets, and legal systems that allow them to legally exchange their property openly.