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Nick Rowe
@MacRoweNick
, 3 tweets, 1 min read Read on Twitter
Think JW basically right in this thread.
A point I've made in old blog posts:
Deviations of target variable from target are the controller's forecast errors, which should be unforecastable, unless the controller make *systematic* mistakes.
So e.g.:
Deviations of inflation from 2% target should be uncorrelated with the policy instrument and with all indicators (with a lag equal to targeting horizon).
And the Phillips Curve should be flat (+/- random noise) at 2%.
Etc.
I call this "Friedman's Thermostat".
The idea predates him, but Friedman came up with the great "Thermostat" metaphor.
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Nick Rowe
@MacRoweNick
A thread on why using Fiscal Policy (not Monetary Policy) to control Y (and so control inflation) is a Bad Idea.
This is a followup to my previous thread (RTd below).
It's also going to be a bit harder.
Sorry.
Praying I don't mess it up. 1/n
To Keep It Simple (for me) I'm only going to consider a Closed Economy.
Y=C+I+G
Remember (from previous thread):
We want 2 things:
1. We want the right *Total* Y (fullish employment, keeping inflation controlled)
2. We also want the right *Mix* of Y (between C & I & G)
If we had the True Model of the economy, this would be easy.
Any mathematician could solve for the endogenous {C,I,G} given the policy instruments {G,T,R}.
Or solve it in reverse, for the settings of the policy instruments needed to get the right Total and right Mix.
Read 16 tweets
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Nick Rowe
@MacRoweNick
Lucas '72, which is (sorta) where microfoundations all began, is a heterogeneous agent model.
It has: old agents (consumers); young agents (producers) on island 1; young agents (producers) on island 2; etc.
It doesn't work with only 1 type of agent (or 1 island). 1/n
Larry Ball's "yeoman farmer" interpretation of the NK model is also, in a sense, a heterogenous agent model. Each agent has a comparative advantage and specialises in producing a different type of fruit, which they trade.
It doesn't work if they all produce the same fruit. 2/n
Or, you can reinterpret the NK model as having literally identical households but heterogeneous firms, each specialising in producing a different type of fruit.
Again, it doesn't work if they all produce the same fruit. 3/n
Read 7 tweets
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Nick Rowe
@MacRoweNick
If I see one more "heterodox" view on the "orthodox" view on "loanable funds" I'm gonna........well, let me do this short thread, instead of heading back to the lake with my canoe: /1
First, if any view is currently "orthodox" in Macro, it is the New Keynesian/Neo-Wicksellian view.
That is the view held by (most?) central bankers & used to guide policy, and taught in (most?) upper-year & grad macro courses. /2
According to that "orthodox" view:
In the Short Run, the (short-term, safe, nominal) rate of interest is set by the central bank at whatever it wants to set it at (subject to ZLB constraints).
This is a pure Liquidity Preference theory of the rate of interest. /3
Read 9 tweets

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