There is a simple idea that frames some of the biggest economic questions of our time and helps to clarify the positions and the stakes in the deepest disagreements over policy. It is that the “[Wicksellian] natural rate of interest” has fallen sharply; what you believe about why this may be determines much of what you believe is the appropriate policy response.
I wrote this two months ago:
The macroeconomic theory everyone seems to be working with (still) is the Wicksellian natural rate of interest. Paul Krugman mentioned it today. It really does create a unifying picture the various views of quantitative easing. Imagine it as the last common ancestor of Austrian, Keynesian and monetarist theories of economics.
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Imagine it as the last common ancestor of Austrian, Keynesian and monetarist theories of economics.
ReplyDeleteI would think it is more accurate to say that Keynes repudiated Wicksell's natural rate of interest.
Henry
Keynes did think there could be multiple natural rates in his writing. However saying the natural rate was irrelevant was actually a mistake on his part. However Keynesian economics does not just consist of 'Talmudic scholars' of Keynes, and so does not continue this mistake (otherwise it would be wrong -- the logical argument behind it would be false).
Delete"Keynesian" economics is a class of models where fiscal policy can have an impact on output. Modern Keynesian economics says that fiscal policy has an impact when the Wicksellian natural rate is negative.
Jason,
ReplyDelete"Keynes did think there could be multiple natural rates in his writing."
I think you might be talking about "own rates", which are quite different from the monetary rate, at least from a Keynesian perspective.
"However saying the natural rate was irrelevant was actually a mistake on his part."
That's a matter of opinion.
And in the current environment where economists, particularly those of the orthodox variety are fixated on interest rates and monetary policy, nothing else seems to be of relevance (and I'm not just talking about fiscal policy).
Henry.
I was referring to multiple equilibria, each with its own 'natural rate'.
DeleteAnd you can't say interest rate doesn't move to bring equilibrium to S = I because S = I is an identity, but then say the level of income moves to bring equilibrium to S = I.
In information transfer model language, you can't say
Δr : S ⇄ I
is not an information equilibrium relationship because S ≡ I and then say
Δy : S ⇄ I
is an information equilibrium relationship. It's not really a matter of opinion; it's illogical.
You have two choices there: either S ⇄ I or S ≡ I. It can't be both.
Actually, I think this kind of thing is one of the best use cases of the information transfer framework. You can easily distinguish identities (A ≡ B) from functional relationships that are equal in equilibrium (A ⇄ B).
Jason,
ReplyDelete"And you can't say interest rate doesn't move to bring equilibrium to S = I because S = I is an identity, but then say the level of income moves to bring equilibrium to S = I."
I didn't say this in my previous but I would probably get around to say this. :-)
"it's illogical."
I haven't studied your IT model so I can't relate to the concepts and the language and so I can't see why you assert the illogicality.
Your model may not fully characterize the functioning of a Keynesian system (I just don't know because I haven't studied it).
H.