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October 19, 2011


Nathan Smith

The reason I add "yet" here is because some of my dissertation work, though not macroeconomics *per se,* has applications to macroeconomics that I've been thinking hard about lately, that I hope might lead to some insights. They are starting to shape my thinking. Let's just say that I certainly don't believe that the economy is in continuous equilibrium, in any (reasonable) sense of that word. In fact, I don't think the economy is ever in equilibrium, and while equilibrium may at some times, and for some purposes, be a sort of approximate picture of reality close enough to the truth in some respects to be useful, this is more true at some times than others. I've got a couple more experiments to run in a simulation to get the results relevant to macro, and I'm expecting results close to the Lucas island model-- http://www.jstor.org/stable/1914364?seq=1 -- but we'll see. Most of the profession seems to reject this model (though admiring it from a technical point of view) because they think that it would be enough for the central bank simply to publish any information they have. I'm skeptical of that dismissal. Maybe having posted this comment will stimulate me to want to finish the model!


I'm also sort of in the middle camp, though the fact of a non-profession choosing such position is probably less interesting. Nevertheless, the reason I'm there is not so much that fiscal stimulus can't work or even that it doesn't usually work for the immediate problem. Rather, I think it causes more systemic problems than it fixes - to some extent the direct distortional problems Nathan mentions, but also in that it reinforces an approach to economic management that is essentially always going to result in regulatory capture over the long term.

Having said that, I continue to think that a much as a garbage sandwich as the 2009 stimulus was, and for all the problems with approach it might represent, I think it probably did do a fair amount of smoothing in the short to medium term, and was probably worthwhile at that time scale. I also don't really buy strict Ricardian equivalence below a certain level of liquidity.

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