We hear that aggregate demand must be increased. Just today in a great article giving 3 mismatches that should be fixed in the global economy we read… “First, aggregate demand is deficient relative to aggregate supply.” – (Restarting the global economy: Three mismatches that need concerted public action, Michael Spence, Danny Leipziger, James Manyika, Ravi […]
Brad DeLong is great as an educator and a thinker. I bet that even he struggles to understand economics fully. We all have to develop theories to progress the field of economics. Brad DeLong has a post where he cites a long text from Keynes about rates of interest and effective demand. Now, I am […]
The greatest goal of economics is to maximize net social benefits. Just imagine how great the United States is. We have great resources in terms of human and capital. Then look at how poorly the economy is performing for society. Obviously, something is wrong, terribly wrong with the economy. What can the Fed do? Can […]
A fat cat is not in good shape. And feeding it more, will not give it energy to be more athletic. Greenspan said… “in assessing real rates [of interest], the central issue is their relationship to an equilibrium interest rate, specifically the real rate level that, if maintained, would keep the economy at its production […]
Yesterday a paper came out by John Williams and Thomas Laubach called, Measuring the Natural Rate of Interest Redux. They presented their model to determine the natural real rate of interest. In short, their model gives a steadily low natural real rate that would justify keeping nominal interest rates low. Paul Krugman jumped on board […]
The Fisher Effect would say that steady and low nominal interests would bring down inflation as the real interest rises to its natural level at full employment. OK… nominal interest rates are steady and low and inflation is low. So is it really the Fisher Effect that is bringing down inflation? Just yesterday I posted […]
Link to graph The graph shows that inflation expectations are still trending lower. This trend is consistent with the Neo-fisherian view that over time, as the Fed rate stays stuck at a low rate, the expected inflation will trend lower as the real rate seeks to rise to its natural level. We have seen in […]
Brad DeLong talks about how other economists view Fed interest rate policies as “price controls”. Then he makes a comparison to the present situation with on an example of a “price floor” in agricultural products. But are low interest rates a price floor or a price ceiling? If you think that interest rates need to […]
An economic slump or recession is considered a bad thing by economists. They point to Sweden and blame Sweden for raising its interest and causing a recession. “Bad Sweden, Bad Sweden”. But those economists are being short-sighted. They do not mention that Sweden is now doing much better than the rest of Europe. They have […]
Within an economy, there are different industries. and each industry would require a different central bank interest rate to function best. But there cannot be a different interest rate from a central bank for each and every industry. What happened when Sweden raised its interest rate? We hear that Sweden raised its interest rate a […]