Worthwhile Canadian Initiative

Macroeconomics and Climate Science: compare and contrast

Similarities:

S1. Both do general equilibrium analysis, trying to understand the interaction between parts of a whole system, with lots of positive and/or negative feedback loops.

Pre- Darwinian Macroeconomics

There are signs of economic recovery. Suppose a year from now it is clear that the economy has indeed recovered. What caused it? Was it: monetary policy; fiscal policy; or did the economy recover by itself?

I don't know the answer to that question; nor does anyone else. If you have one world recovery, and three competing hypotheses to explain that single data point, you don't know the answer. So we resort to theory, and see if theory, backed by multiple data points from past recoveries, can help us answer the question.

Macroeconomic theory tells us how monetary policy is supposed to work; and it tells us how fiscal policy is supposed to work. But macroeconomic theory (at least, the modern, canonical, neo-Wicksellian model) does not tell us how economies are supposed to recover by themselves. Like pre-Darwinian biology, it only works if there is some sort of designer or creator to make it work: in this case the monetary and/or fiscal authorities, rather than a divine being.

Always hire the worst

"Are you sitting comfortably? Then I'll begin.

Once upon a time, in a city called Ottawa...."

"I thought it was called Windsor?"

"No dear, that's another story. Once upon a time, the City of Ottawa needed to hire one person to do a job...."

"I thought it was a car factory?"

Some simple arithmetic of Canadian debt and deficits

Various numbers for projected deficits have been reported recently. This post tries to put those numbers into perspective.

The Bank of Canada's Financial System Review

The Bank of Canada published its December 2008 Financial System Review yesterday. I spent a few hours reading it through (something I had never bothered to do in the past).

Some observations:

By Tuesday Morning, any proposed 0% Inflation Target will be dead

Before the financial crisis came along, the main question of Canadian monetary policy was whether to revise the Bank of Canada's 2% inflation target. Should the Bank target a lower inflation rate, like 1%, or even 0% inflation? Or should the Bank switch to a target path for the price level?

Does Canada need a Fiscal Stimulus? - Discuss

My own view, for what it's worth, is that Canada does not need a fiscal stimulus right now, but there's a possibility it might need one soon, so the government should get everything ready to introduce one as quickly as possible, but not pull the trigger quite yet. My preferred fiscal stimulus would be a temporary GST cut, and/or an increase in government investment spending, especially construction spending. (I would give a different answer for the US, UK, or Euroland, but that's not the question.)

Here is why I believe that.