May 12, 2003
Paul Krugman's "Thinking About the Liquidity Trap"

Paul Krugman's "Thinking About the Liquidity Trap": Thinking about the liquidity trap: We live in the Age of the Central Banker - an era in which Greenspan, Duisenberg, and Hayami are household words, in which monetary policy is generally believed to be so effective that it cannot safely be left in the hands of politicians who might use it to their advantage. Through much of the world, quasi-independent central banks are now entrusted with the job of steering economies between the rocks of inflation and the whirlpool of deflation. Their judgement is often questioned, but their power is not. It is therefore ironic as well as unnerving that precisely at this moment, when we have all become sort-of monetarists, the long-scorned Keynesian challenge to monetary policy - the claim that it is ineffective at recession-fighting, because you can?t push on a string - has reemerged as a real issue. So far only Japan has actually found itself in liquidity-trap conditions, but if it has happened once it can happen again, and if it can happen here it presumably can happen elsewhere. So even if Japan does eventually emerge from its slump, the question of how it became trapped and what...

Posted by DeLong at 07:28 AM

February 14, 2003
Notes: Macro Field Course: February 12, 2003

Economics 236: February 12 Post-Class Notes On February 12 I taught Andrei Shleifer's "Implementation Cycles" (Journal of Political Economy, 1986) paper to my advanced macroeconomics Ph.D. students class. Once again, just has happened the week before, I didn't get through the paper. I had thought it would be easy--that I would finish with plenty of time to sketch extensions and qualifications. After all, the class does run from 12 to 2. However, that was not enough time. My recurrent problem is that I spend so much time in asides on the modeling strategy--"this term is in this definition because twenty minutes from now it will cancel that when we take a derivative to establish the first-order condition", "note that even though we have started with a rather general and flexible setup in which firms have a number of different decisions to make, the setup has been carefully designed so that when push comes to shove there is only one economically interesting and non-obvious decision a firm ever has to make", "note that if this condition is not satisfied, then the consumer's utility is infinite and it is not clear in what sense we can say that the model even has...

Posted by DeLong at 04:48 PM