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In your model, can't the central bank make GDP infinite by printing an infinite quantity of money? Or if the central bank tries to do that do we get non-monetary prices like queuing times?

Alex: Yep. One or the other, depending on whether real resources are scarce, or the central bank was a big blue meany that liked unemployed resources. But I did say it's a crazy world.

So if the CB promises to increase NGDP in the future then this will either

1) Increase inflation expectations which lower current real interest rates and get people investing which will increase NGDP in the present.
or
2) Increase expectations of future RGDP growth , which will get people to increase current spending which will increase NGDP in the present.

So it seems like if you can only make people believe that you will increase NGDP tomorrow you can increase NGDP today. But the problem is that as you may not actually need to increase NGDP tomorrow people may not take seriously your commitment to do it.

This seems a weird way of looking at things and is based presumably on the premise that either you can't actually raise NGDP today without these tricks or if you could (and did) it would lead to just inflation and no RGDP growth. Its seems pretty unlikely that the CB couldn't raise NGDP (otherwise it could buy all the assets in the world without nominal spending increasing). And if the CB can increase NGDP, but this resulted only in inflation, wouldn't that allow real rates to be below 0% and lead to an increase in investment, which would increase RGDP ?

I guess I'm just missing the reasons behind the "committing to be irresponsible" thing that Krugman often mentioned and may be part of Delong's thinking too.


Ron: forget about monetary policy for a minute, and think about ordinary life. We make promises, and usually we keep those promises, and usually people expect us to keep those promises, even when we wouldn't do what we had promised to do, if we didn't feel an obligation to keep our promise. In fact, if we we going to do it anyway, we wouldn't need to have made a promise.

Is the practice of promising puzzling, at a philosophical level? Yes, deeply. But at an ordinary commonsense level, it isn't puzzling at all.

If someone makes a promise to do something in the future in order to get out of doing something in the present, and the thing they promise to do is against their nature (A bookworm says "I promise to go out dancing tomorrow as long as you let me stay home and read tonight") then they may have trouble being believed.

There doesn't seem any reason why central banks have to take that chance. They have the power to boost NGDP in the present. If monetarists are wrong and this doesn't boost RGDP directly by causing a movement up the AS curve then it has to reduce real interest rates by increasing inflation , which will increase investments and get things moving the Keynesian way.

Ron: we make promises to change other people's expectations about our own future behaviour, because we want to change their current actions. If we thought that they thought that we would want to do the promised thing anyway, we wouldn't need to promise. We only promise because they wouldn't otherwise believe we would do the thing we promised to do.

"They have the power to boost NGDP in the present."

Suppose people expected that central banks would reduce near future NGDP back down again to its current level. Would they still have the power to boost NGDP in the present? In other words, how much does current NGDP depend upon expected future NGDP? I would say "a lot, especially at the ZLB".

Ah, now I see the dilemma. Present and future policies cannot be as easily separated as I was assuming. But couldn't this be overcome by using monetary policy for fiscal ends ? For example: Increasing the money supply via funding tax breaks on investment or (if all fails) funding direct government projects. These would boost RGDP irrespective of people's expectations about future monetary policy

Yes. If I could go back in time and persuade Larry Summers in 1999 to create a Treasury security that was a nominal GDP future rather than one that had a CPI future embedded in it, I would point to the fall in expected nominal GDP in 2018 and call Bernanke's policies a failure for that--superior--reason.

But I can't. So I have to point to the TIP-Treasury spread.

And if I had a time machine, also, I would request both real and nominal consols. I really want to see both real and nominal consols right now...

Thanks Brad. I think we are on the same page.

Ron: "Present and future policies cannot be as easily separated as I was assuming."

Yep. And that's true for fiscal policy too. Yes, fiscal policy can work, but whether or not it works depends also on expected future fiscal policy.

Brad,

"If I could go back in time and persuade Larry Summers in 1999 to create a Treasury security that was a nominal GDP future rather than one that had a CPI future embedded in it, I would point to the fall in expected nominal GDP in 2018 and call Bernanke's policies a failure for that--superior--reason."

What you want instead is a government liability that has a high return on investment during slow growth times and a low return on investment during higher growth times. You want an output gap future, not a GDP future.

Did the whole concept of countercyclical fiscal policy die when I wasn't looking?

Frank: see my recent post on countercyclical fiscal policy

Nick,

Yes I read it.

"Suppose we want a countercyclical fiscal policy to help smooth out those fluctuations in the natural rate, to help prevent us hitting the ZLB. What would countercyclical fiscal policy look like, in the same picture?"

Are nominal GDP futures pro-cyclical or counter-cyclical in a New Keynesian framework? I would think they would be pro-cyclical in that the return on investment would be positively correlated with the present growth rate of the economy.

Levying taxes is not monetary policy.

But I agree that if we increased taxes on capital income or even wealth, then this would increase aggregate demand.

... assuming that this was offset by tax cuts on labor income or consumption

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