Mostly Economics

I posted earlier about how certain economists who say they are anti-keynes are actually keynesian. They use Keynesian ideas into their models. One such economist is John Taylor.

He responds on his blog.  He says his idea of Keynes is discretionary governemnt spending and that is what he opposes:

In my view the essence of the Keynesian approach to macro policy is the use by government officials of discretionary countercyclical actions and interventions to prevent or mitigate recessions or to speed up recoveries. Since I have long been critical of the use of discretionary policy in this way, I think the Economist is correct so say that I am anti-Keynesian in this sense of the word. Indeed, the models that I have built support the use of policy rules, such as the Taylor rule for monetary policy or the automatic stabilizers for fiscal policy, which are the polar opposite of Keynesian discretion. As a practical prescription for improving the economy, the empirical evidence is clear in my view that discretionary Keynesian policy does not work and the experience of the past three years confirms this view.

He points to work of Friedman (on top reading list now) who divides Keynes thoughts in two types – political and economic:

Milton Friedman wrote a wonderful review essay on Keynes’ influence on economics and politics which touches on these issues and is still well worth reading. Friedman distinguished between Keynes’ political bequest—the advocacy of discretionary actions taken by powerful government officials—and his economic bequest—the emphasis on aggregate demand as a source of business cycle fluctuations. In the last section of the essay Friedman argues—quoting extensively from Keynes’ famous letter to Hayek on the Road to Serfdom—that the political bequest was very harmful while the economic bequest has many important insights. For simlar reasons using rational expectations models with rigidities or advocating policy rules which react to real economic variables is not inconsistent with an anti-Keynesian or rules-based approach to policy in practice.

Well well well…What does one say to that?

That has principly been the problem…blame every Keynes idea as a bad…

Anyways now people are segmenting good Keynes ideas from bad..interesting and confused times…

James Wilcox of UCB tries to resolve the puzzle.

There is an apparent puzzle when you read views on US economy. Banks say credit growth has hardly declined. However companies say it has contracted like never before. With corporates, small business say they are badly effected. How does one resolve this puzzle?

Wilcox says answers lie in securitization market which has dried up post crisis. Small businesses rely indirectly on these markets as earlier banks would just sell small sector loans for securitization. Now this does not happen as there is no market to sell. Hence despite banks saying no decline, small firms feel the contraction.

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