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If this means the Fed / Treasury should be sending out checks of USD to taxpayers, I agree with you.

I'm pretty sure that with the house price and stock price bubbles popping, some $60 tr of paper wealth has disappeared. So there are, today, far too many bankers. More banks need to fail.

The bailout so far is mostly to save the top elite bankers from the discipline of failing so badly.

Your deflation definition was also fine. Welcome (I'm new here, too.)

Very interesting – preventing an economic recession also prevents a recession in the normal path of central bank balance sheet growth. The deficit required to prevent economic recession gets funded by the desired outcome for the central bank balance sheet.

Out of curiosity (and pardon my ignorance), what actually forces the BoC to not decrease the overnight rate below 0%? The effect of course being that money would flow in the opposite diection. In this case, the BoC would not be able to 'run out of bullets' if it could pay banks to borrow from it.

Is there some problem with this that I'm not seeing?

Tom Grey: money-financed transfers, or tax cuts, should work, but then people might save it. Money-financed government expenditure, by definition, gets spent. Though the UK temporary cut in VAT (their version of GST) could also give an incentive to buy now. And welcome!

JKH: Yep, that's a good way of looking at it.

Andrew: Since we can always earn zero nominal interest just by holding cash, and keeping it under the mattress (or in a safety deposit box), the BoC cannot force interest rates below zero (if it tried, the demand for cash would be infinite). Actually, this is not exactly true, because of the risk of theft if you keep it under the mattress, or the cost of a safety deposit box. And a few days ago, the interest rate on some US T-bills did go briefly negative by a tiny amount. But it's close enough to true. The only way to really get negative nominal interest rates is to put some sort of tax on holding paper money, or have the notes expire after a certain date. But these are just too inconvenient for everybody.

Nick: RE does not imply that consumption would fall as much as g increases! The higher taxes in the future shift the intertemporal budget constraint in; the present value of lifetime consumption must fall by the amount of the g increase. So consumption falls some in every period - with the usual preference for smoothing. Making consumption fall today by as much as G rose puts all the burden of the reduction in the present value of lifetime income on today's consumption alone. So demand rises today. That's why Barro looks for increases in G to raise interest rates, however it is financed.

kevin: yes, you are right; I was being a bit sloppy. Under RE, a bond-financed increase in G is equivalent to a tax-financed increase in G (the balanced budget multiplier is still there). But the standard balanced budget multiplier does (implicitly) assume zero substitutability between government and private expenditure. At the other extreme, if we assume perfect substitutability (the government buys us stuff we would have bought for ourselves anyway), then the balance budget multiplier disappears too.

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