Worthwhile Canadian Initiative

Greece, the Eurozone, and Canada

I have been following the story about Greece. Like some other Eurozone countries, Greece has high deficit/GDP and debt/GDP ratios. Unlike Canada, but like Canadian provinces, Greece cannot print money. Eurozone countries are like Canadian provinces, as I argued in here back in January. But the Eurozone, unlike Canada, lacks a federal fiscal authority. The Eurozone is what Canada would be if we abolished the federal government, except for the Bank of Canada.

I rather stuck my neck out in that January post. I had "poster's regret" soon after. But now I'm looking a lot more prescient than I felt at the time. (Which proves it would be sheer luck, even if I do turn out to be right).

Random Thoughts

Sometimes my brain can't concentrate on any one topic long enough to write a serious post. Or maybe I just don't know enough to give a good answer to some question I want to answer. So here is a random collection of thoughts:

What is "the natural rate of interest"?

"The natural rate of interest" is a theoretical construct. It is a theoretical construct that only has a defined meaning within a certain class of economic models. And even within that class of models, the exact definition may vary from one model to the next.

Why do (bad) banks (really) matter?

I'm going to put forward two perspectives on why bad banks might be important in understanding the recession: an orthodox perspective; and a heterodox perspective.

In praise of (a little bit of) fiscal dominance

Who makes sure the long run consolidated government-central bank budget constraint balances? Is it the government? Or is it the central bank? The former gives us a Ricardian regime; the latter gives us fiscal dominance.

Most macroeconomists take a Ricardian regime as their unspoken assumption; and, if pressed, would recommend a Ricardian regime, as is required, in the long run, by central bank independence. If the central bank is to have the independence to pursue its own objectives (be it inflation targeting or whatever), the government must take long run responsibility for its own deficits, grateful for whatever profits from seigniorage revenues the central bank deigns to hand over. Worries about the "coordination of monetary and fiscal policies", heard often in Canada until the mid-1990's, were code for the desire for a Ricardian regime.

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.

Accounting and Economics; and Money

To paraphrase Churchill, accountants and economists are divided by a common language. We seem to be using the same words to talk about the same things, but we don't understand what the other is saying. This is my attempt to provide an economist's perspective on the relation between accounting and economics.

What I say here will not I think be new or controversial for economists (until I start talking about money). Accountants may find it hilariously wrong, like locals hearing tales from a traveller who can't speak the local dialect and gets everything muddled. Let's see.

Promising to keep nominal interest rates low for too long

I was lucky enough to be invited to a Bank of Canada conference on Thursday and Friday. The topic was "New Frontiers in Monetary Policy Design". One recurring theme in particular has stuck in my mind: that a credible promise to keep interest rates low for too long can help an economy escape a liquidity trap. (I apologise for not remembering which presenter or commenter expressed the point so clearly in this way that it stuck in my mind.)

Deflationary death-spirals and the social construction of monetary policy

I present a simple macro model and use it as a vehicle to explore the idea that it matters how monetary policy is framed. One framing leads to a deflationary spiral, which an alternate framing can avoid or escape. The model is an otherwise bog-standard New Keynesian/Neo-Wicksellian model, but with a minor modification in the financial sector.

Interest rate targeting as a social construction

We always knew that interest rate targeting could never work in theory, because it left the price level indeterminate. But it seemed to work well in practice, and kept inflation close to target, so we eventually learned to overcome our theoretical squeamishness and embrace it as part of the reality of how modern central banks operate. But now interest rate targeting has failed in practice, and failed badly. It cannot keep inflation, and expected inflation, on target. We want to loosen monetary policy. And because monetary policy is interest rate targeting, we can't, because interest rates on safe liquid assets are already at zero.