"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Saturday, February 27, 2010

Really great and worthwhile links - countercyclical barter - leaning against the wind - Krugman - Brad DeLong - two LRAS curves

Nick Rowe - Is Barter Countercyclical? - "Barter increases in recessions, like now, and decreases in booms. Can anyone confirm this? Because that fact (if it is a fact) is really important in understanding the nature of business cycles and recessions. Countercyclical barter is exactly what one would predict from a monetary (deficient aggregate demand) theory of recessions. It makes no sense from a real business cycle or recalculation theory of recessions."

Hans Gersbach - "In boom periods, central banks can "lean against the wind" by using a combination of short-term interest rate increases and raising the required aggregate bank-equity ratios. For instance, in a boom with low inflation and rapid growth of the banking sector’s balance sheet, raising the aggregate equity ratio might be the primary vehicle for moderating the boom, putting a lower weight on interest rate hikes. If the boom is accompanied by higher inflation, increasing short-term interest rates can be used together with higher aggregate bank-equity requirements to moderate inflation and to prevent the build-up of excessive leverage in the entire banking sector, thus lowering the risk of a future banking crisis. As a consequence, many of the drawbacks of Basel II (see Hellwig (2008)) can be avoided."

Paul Krugman - "Effective protection: Imagine autos cost $10,000 on foreign market. Suppose that a 20% tariff is placed on auto imports. However, only assembly locates in your country; imported inputs of $8,000. Then, arguably, domestic assembly industry receives 100% protection: at domestic prices it adds $4000 to value added even though at international prices it adds only $2000"

Brad DeLong - "Third, Barro characterizes the stimulus bill as a two-year $600 billion increase in government purchases. But about half of the stimulus money spent to date is on the tax and transfer side, and about a quarter is direct aid to states which enables them not to raise taxes during this recession. It seems to me that Barro should be weighted-averaging his spending multiplier of 0.6 and his tax multiplier of 1.1 to get an ARRA multiplier of 0.9—in which case our social profit is not $160 billion but rather $340 billion, and we should certainly do this again, and again, and again. (Until, that is, there are signs that additional stimulus may start to threaten price-level or debt-management stability, or until unemployment falls far enough to make Barro’s multipliers overestimates.)"

Lorenzo Bini Smaghi - "...Keynes’ famous admonition in the last page of his General Theory – according to which “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist” – has been turned upside down. In other words, defunct economists – and their theories – are usually enslaved by practical men who do not fully understand them."

Nick Rowe - "That story makes much more sense (empirically). It's like Okun's "toll model". Firm and worker each have to pay a "toll" (search costs) before the interview. (Like the admission ticket to the disco, but don't push that metaphor too far.) But even if the labour market is perfectly competitive ex ante (before they pay the search costs), there is bilateral monopoly/monopsony ex post, between an individual firm and worker, once those search costs are sunk. So the wage can be anywhere between those two "threat points", and both sides will still want to do the deal. (The "Nash Bargaining Solution" says the equilibrium will be at a particular point, say halfway, between those threat points, but that equilibrium isn't especially compelling, so Roger has ditched it.)

So, take my LRAS/AD picture above, and colour in the *whole area* between the red and blue LRAS curves. It's all one big thick LRAS curve. If we are on one of the two AD curves, and somewhere inside that thick LRAS region, it's an equilibrium. And where in particular we will be, depends on history, animal spirits, Schelling focal points, or whatever."

Stephen Gordon - Ineffectiveness of minimum wages as an anti-poverty measure - "If you want an effective anti-poverty measure, give money to poor people. It really is that simple."

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