No they don’t
October 16th, 2009A perfectly standard New Keynesian model, with intertemporal optimization and all that — the kind of model that is standard in freshwater courses — says that under current conditions fiscal stimulus should be very strong… (emphasis added)
The abstract from a perfectly standard New Keynesian model:
This paper argues that if the zero bound on nominal interest rates is binding [and monetary policy is passive], then the government spending multiplier is large.
From today’s WSJ:
October 16th, 2009 at 6:04 pm
So, wait, what? — Are you disagreeing with Krugman because a) the nominal lower bound is not binding; b) monetary policy is not passive?
October 16th, 2009 at 6:12 pm
Presumably because the yield curve picture indicates that we are not at the zero bound on nominal interest rates. Sumner’s response to Krugman would be that monetary policy should never be passive and can always be effective.
October 16th, 2009 at 6:17 pm
If I read the graph right, the 3-mo T-bill’s return is zero “Friday” and positive 1 year ago. So, if “current conditions” = Friday…?
Anyways, the problem here is caused by the fact that people are still following what Krugman says. Big mistake.
Finally, although I could look into it more, since Ambrosini has been pushing the C.E.R. paper, I took a look and am I the only one who doesn’t believe neither their impulse nor their propagation?
October 16th, 2009 at 7:05 pm
CER provides a framework for discussion. That’s all.
That said, their pithy abstract should include a qualification about the stance of monetary policy (like the one I added in brackets).
October 16th, 2009 at 8:58 pm
Discussion: you can get a multiplier if you allow for a painfully small set of assets, add add-hoc price rigidity (i.e. independent of the incentives to keep/change prices) and restrict monetary policy to a Taylor rule. Oh, yeah, and this a model with no unemployment (in the serious sense of the word) and no financial imperfection (since there is only one asset?). No investment means no implicit international trade/slippage too.
I don’t want to be mean or contrarian but I guess this is as good of a time as any to repeat the claim that the “NK” branch of the DSGE tree has thrown the baby out with the bathwater.
October 17th, 2009 at 12:06 am
Gabriel, even with all those terrible assumptions, the paper still doesn’t suggest “current conditions” call for fiscal stimulus.
October 17th, 2009 at 7:28 am
Actually, can you elaborate on that, please?
October 17th, 2009 at 4:13 pm
Nominal interest rates aren’t zero right now so the liquidity trap papers are silent about fiscal policy. To get fiscal policy to work, the models would have to have even more assumptions. Something like in Gali’s paper where over 25% of agents have to be fully backwards looking.
October 17th, 2009 at 4:32 pm
But the “Friday” curve is zero for 3 mo T-bills. Or am I really misreading the graph?
October 17th, 2009 at 4:37 pm
I also started writing a comment about how I know of a couple of models that “get fiscal policy to work”, for example IS-LM or naive expectations Phillips curve but then I thought, why be an a-hole
Seriously, though, there’s also the issue of whether you do or do not get a larger than 1 multiplier versus is it a good idea, from a welfare point of view, to do it…
October 17th, 2009 at 7:04 pm
The one year t-bill is a third of a percent (33bp). Isn’t that consistent with zero bounds, as most people would define it?
October 17th, 2009 at 10:43 pm
Why is that particular maturity special?
October 18th, 2009 at 11:04 am
Well, the 1 & 3 month is at 5 & 6 bps. I’m missing it (I don’t follow these debates closely) – is your argument that the 1 & 3 month could go less somehow, or that the Fed can target the 30-year, sitting at 4.2%?
October 18th, 2009 at 11:08 am
Are you messing with me? “The” nominal risk-free interest rate, the object of theory, isn’t zero.