Nighttime Must-Read: Paul Krugman: Not Invented Here Macroeconomics
Not Invented Here Macroeconomics:
“[Richard] Koo had a big and important idea….
As long as some part of the private sector has… levels of debt that now look excessive, the efforts of debtors to pay off their debts… [is] a persistent drag… hard to counter with monetary policy, because many players in the economy can’t or won’t spend more…. Deficit spending can play a useful role… by providing a favorable environment for debtors to deleverage…. This is a very useful insight…
But Koo[‘s]… antipathy to monetary policy does not… emerge naturally…. Yes, it’s going to be hard… but there have to be some players who aren’t excessively indebted…. And to the extent that central banks can raise inflation and/or fight deflation, this is an especially valuable thing…. [Yet] Koo… rejects any alternative… for reasons unclear…”
Where I see Richard Koo’s principal value-added is that his analysis provides a handle you can use in thinking about how the IS curve is going to evolve over time: that in the short run only expansionary fiscal policy (government leveraging up to offset the drag produced by private-sector deleveraging) can shift the IS curve, and that in the medium and long runs the recovery of the IS curve is most likely to be driven not by things like summoning the Confidence Fairy but by the slow process of deleveraging.
But to the extent that you believe that expectational shifts can be important–either that balancing the government budget or performing other rituals can summon the Confidence Fairy, or that expansionary monetary policy can summon the Inflation-Expectations Imp–Koo’s analysis will look inadequate. And so it does look inadequate to Krugman, at least to the permanent-monetary-expansion-would-fix-the-problem side of Krugman…