Wednesday, 19 June 2013

Nick Rowe explains fiscal policy using a New Keynesian model

Nick Rowe has a great article at his blog called Worthwhile Canadian Initiative on
new-keynesian-countercyclical-fiscal-policy-isnt-what-you-probably-think-it-is.

He examines fiscal policy using a New Keynesian model.

Note his opening words "If it weren't for the Zero Lower Bound on nominal interest rates, there would be no macroeconomic role for fiscal policy in New Keynesian models. "



BUT note his last paragraph.
"Now suppose you had fiscal policy run by a bunch of nutters, who didn't understand macroeconomics at all. The nutters think that booms are a good time to be increasing government spending, "because we can afford it"; and recessions would be a good time to be decreasing government spending, "because we can't afford it". What would it look like? Might it look a lot like optimal New Keynesian fiscal policy?"

Hmm very interesting don't you think?

What do I think?  Nick has a link to a previous comment he made which is hard to disagree with.


 This of course shall be in Around the Traps tomorrow