Wonkish, self-indulgent, and self-aggrandizing: I've been reading this paper by Guerrieri et al more closely (a) to make sure I understand how it works (b) to see if there's a way to do it simply. I think I've succeeded in (a) 1/
The key point is that locking down part of the economy *could* be expansionary/inflationary for the rest, bc people might switch demand over — u can't go to sports events, so you buy more booze. 2/
But against this cutoff of some goods increases incentive to postpone consumption in general, plus lost incomes in affected sector lead to lower demand. So what we actually seem to see, which is deflationary overall impact, makes sense 3/
I have, however, failed in (b) — which is great. The authors have followed the strategy I always push, of model with minimum number of moving parts, using in particular a trick I used in my old liquidity trap paper 4/ brookings.edu/bpea-articles/…
That is, they deal with dynamics by putting all shocks in period zero, then assume an unchanging future, which lets them do a quasi-one-period model. 5/
Imitation is the sincerest form of flattery, so I just wrenched my arm patting myself on the back. On the other hand, maybe what this shows is that I'm an old dog without any new tricks, and the whippersnappers know everything I know plus 6/
Anyway, great stuff — deep thinking with immediate real-world usefulness, produced very fast. Here's to good economics in bad times 7/
