Nick Rowe - Tinkerbell in New Keynesian models - Absolute must-read - "Framing matters. Tinkerbell is real and all-pervasive. She flies in New Keynesian models all the time.
A. In the IS curve in old Keynesian models, a fall in the real rate of interest causes an increase in demand.
B. In the IS curve in New Keynesian models, a fall in the real rate of interest causes an increase in current demand, relative to planned future demand.
C. In the IS curve in New Keynesian models, a fall in the real rate of interest causes a decrease in planned future demand, relative to current demand.
A and B sound very similar. It's just that B adds an extra variable (planned future demand) that can shift the IS curve. An increase in planned future demand will shift the IS curve to the right. That sounds quite plausible from an Old Keynesian perspective anyway. If planned future demand increases, expected future incomes should increase too, and so people will want to consume more today, and firms will want to invest more today. So B makes the New Keynesian IS curve sound very similar to the Old Keynesian IS curve. It isn't. They are very different.
C sounds totally different from B. But it's not. C and B are logically equivalent. They are just different ways of describing the same Euler equation that underlies the New Keynesian IS curve. C is a way of describing the New Keynesian IS curve that forces you to realise that it is very different from the Old Keynesian IS curve."
Tyler Cowen - Trust - "Call me naive, but I believe that most of these politicians would in fact prefer to spend the money and hand out goodies to favored constituencies.
What may be destroying economic recovery is not fiscal contraction, but rather lack of trust, "Trust" is an underused word in macroeconomics."
Edward Chancellor - The dreadful potential of frugality - "Germany wants countries, such as Spain, to get their public finances in order. Yet if Spain is to reduce its fiscal deficit without too much pain, two conditions are necessary. First, the country’s trade position must shift into surplus. This is problematic since labour costs are high relative to Germany and Spain cannot devalue its currency. Second, the private sector must move back into deficit. Yet it is difficult to see Spanish households and companies wanting to borrow more given the ongoing problems caused by the collapse of the property bubble."
Eric Falkenstein - Arthur Brooks on happiness - "Arthur Brooks, president of the AEI, has a new book out, The Battle, and he makes an interesting claim. He states that the key factor in one's happiness--not experiential happiness, but 'remembered happiness' that is more correlated with 'life satisfaction', see Kahneman on the difference--is 'perceived earned success'. This is the willingness and ability to create value in your life or the life of others. He states that if you ask someone if they feel like they are creating such value, they are happy, regardless of how much they make. Giving people money, via welfare or inheritance, does not make people happy, because this if anything discourages the effort needed to find and develop such a niche."
"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008