Thread by @RomanchukBrian

Short explanation of why any discussion of r,g as being constraints on fiscal policy is self-evidently wrong.

I’m pretty sure that I covered this before, but I stripped out all the distractions. bondeconomics.com/2019/06/why-sp…

There’s some simple equations, but the logic is straightforward: there cannot be a steady state real rate of interest that is independent of policy choices, or else stupid stuff happens.

Since the steady state rate of interest depends on policy, we cannot say it constrains it.

I decided to add a small appendix, since some people might jump up and down about my “fiscal policy rule.” Should be up shortly...

The technical appendix is up. I didn’t make a big deal about it, but this is an example of how one should approach macro theory: model agnosticism.
Rather than show the property holds in a model, demonstrate that models which violate it are crazy.

The SFC literature (e.g. Godley’s papers) do this, but it needs to be formalised more.
(My article is loose, but it would not be hard to tighten up, since the concept is trivial.)

And for any followers who are familiar with neoclassical theory: parameter uncertainty does not cut it. Parameter uncertainty misses a lot of critical model uncertainty.

Case in point: control engineers abandoned optimal control theory because of this (neoclassicals didn’t get that memo). Optimal control rules fail spectacularly in the presence of time delays - while trivial PID rules are robust to time delays.