James Hamilton — Who anticipated the Great Depression?

Interesting paper on Gustav Cassel's disagreement with the view of Keynes that fiscal policy was needed to pull out of the Great Depression rather than monetary policy.

[Cassel] viewed Keynes' treatment of interest as being driven by liquidity preference as "a most astonishing step backward" because "the determination of the rate of interest as a scarcity price paid for the use of capital occupies, and must continue to occupy, a central position in the general theory of price formation," with liquidity being a secondary concern (p. 440).26

Cassel (1931, p. 443) rejected the idea of spending on public works as a depression remedy: "[C]onsidering what governments have done and still do to deter private investment by high and arbitrary taxation, by all sorts of restrictions, national and international, and by bad monetary policy, it is, to say the least of it, curious that such mistakes should be exploited as a ground for widening the functions of governments as entrepreneurs."27 Instead, central banks should provide enough money to prevent disturbances, arising from the hoarding of cash, from interfering with stable prices and full employment. If the monetary authorities acted to ensure stable prices and full employment, "there would be no room for the mass of dilettante proposals to cure an imaginary illness of the economy by those highly artificial forms of money for which Keynes has expressed his most inappropriate sympathy."

It would seem that ZIRP and QE 1, 2, and 3 disconfirm Cassel's theory, unless it be argued that the Fed was too stingy with creating reserve balances. We are over five years into this and while the banks were rescued from insolvency by extraordinary forbearance, the US, UK, and EZ economies are stuck in the doldrums with the highest levels of long term unemployment since the Great Depression. Monetary policy, even extraordinary measures, do not work, unless the central banks can find another rabbit to pull out of their hats that does better. Let's put this myth to bed once and for all.

Econobrowser
Who anticipated the Great Depression?
James Hamilton

Matias Vernengo — What's the deal with PPP?

It is obvious that there are 'imperfections' and the natural rate of interest is not equalized in the real world, so the exchange rate also deviate from the natural rate. But that isn't the main problem with the mainstream view. As we saw, the capital debates undermine the theoretical basis for a natural rate of interest, and hence for a natural exchange rate (or a natural rate of unemployment for that matter). Hence, it is the Keynesian (and Sraffian) institutional rate of interest, as determined by monetary authorities that rules the roost. The conventional rate of interest is then connected to a conventional exchange rate [ther institutional factors become relevant, like the existence or not of capital controls, etc.].

Leave aside the theoretical problems of purchasing power parity measures, since they are NOT attractors of the actual exchange rates [the reasons why Argentina had a 1 to 1 exchange rate with the dollar for a decade, or Greece has a 'fixed' parity too are political and institutional], and even if for some purposes you may want to use PPP rates as a measure of material welfare, one may also be interested in actual market exchange rates for other purposes. Indeed, for most of the relevant matters that concern economic well being, particularly in peripheral countries, like the capacity to repay foreign debt and avoid default and import capital goods to promote growth, it is the market exchange rate that is central to convert incomes in different countries into a common numeraire.

Naked Keynesianism

What's the deal with PPP?
Matias Vernengo | Associate Professor, University of Utah