Economics and similar, for the sleep-deprived
A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?
Update: seemingly not
Update: Oh yeah!
Wednesday, September 01, 2010
In which I might (or might not) disagree with Prof Krugman, on something which might (or might not) be important
In the 1998 "Japan's Trap" note, Krugman's conclusion is that "the central bank needs to credibly promise ... that it will permit inflation to occur". But, in the process of simplifying the model to draw out the key intuition, he has basically converted it from a full intertemporal optimisation model into a two-period one with respect to the price level.
Therefore, strictly speaking, with respect to this model, the word "inflation" above is not actually right - what happens in the simplified model is that the central bank accomodates a one-off upward shift in the price level, then (as noted earlier in the paper), the price level remains constant at P*=M*/y* for the rest of time.
The question I'm asking here is - if one were to move to the full intertemporal version of the model, would this still be the case? Would the necessay policy be to target a positive inflation rate, or to target a price level shift? I think this could potentially matter quite a lot for a variety of political economy reasons. I think it's only a price level shift that's needed, not a commitment to inflation, but I have arrived at this via a very different thought process (basically that of considering a country with a commodity-standard currency having a devaluation). Can anyone who hasn't forgotten dynamic programming quite as comprehensively as I have shed some light?
this item posted by the management 9/01/2010 03:02:00 AM