Krugman and Waldmann

Paul Krugman picks up on Angry Bear Robert Waldmann’s post  “Why Does Fiscal Stimulus Work? ” discussing John Cochrane’s ideas on Keynesians.

So some props to John Cochrane for at least trying to catch up. Unfortunately, he’s still working from the baseline assumption that people like me (and Mike Woodford, whom he really should be reading) must be kind of stupid, and so he can’t be bothered to actually figure out how the models work. At least I think that’s what’s happening.

As Robert Waldmann says, Cochrane’s latest seems to be driven by a confusion between the effect of fiscal expansion on GDP — which is positive in just about any NK model — and the effect on consumption, which isn’t at all the same thing. I won’t try to figure out the roots of this failure of reading comprehension; let me instead try to explain what’s really going on.