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Can we stop talking about inflation when we mean output growth?

Brad DeLong has a nice post on the euro crisis. Q&A session with himself (and yes he throws himself some soft balls, but hey those are relevant questions!). However, he says on the third question:
"(3) Q: How Should Greece Balance Its Spending on Imports and Its Exports Going Forward?
A: Borrowing to cover the gap between imports and exports that exists at current exchange rates and price and wage levels is not going to happen, so Greece has a choice between (a) deep prolonged depression to make Greeks too poor to afford imports, (b) Grexit, devaluation, and a subsequent export boom, and (c ) Germans opening up the monetary spigots to produce higher inflation in northern Europe and meanwhile giving Greece an additional fortune to keep the pain in Greece low enough for adjustment to take place within the Eurozone framework (emphasis added)."
If Germany actually went for fiscal expansion (or even monetary) and more demand for goods and services, including a few Greek ones (more olive oil, and a few more sunny vacations) it would not lead to inflation. Unless somebody thinks Germany is close to full capacity and growing fast. Why Keynesians have accepted the inflation expectations fairy is beyond me!


  1. I think the answer is going to be No. The assumption that, apart from depressions and/or liquidity traps, the economy can be considered as operating at aggregate supply-determined full employment is pretty central to the New Keynesian project. If DeLong agreed that increased demand in e.g. Germany will normally increase real output, he'd have to admit that everything his grad students learn in first year macro is useless and wrong.

    1. The acceptance of the Friedmanian natural rate, the supply side limit, is the reason why New Keynesians look more like followers of Friedman than Keynes. Sad, but true, it is central to their project.

  2. "If Germany actually went for fiscal expansion ... it would not lead to inflation."

    This is true, but it's not what DeLong is saying - in his post the causality runs the other way. You're absolutely right about what would happen if Germany increased *fiscal* stimulus, but that's not how monetary stimulus works.

    The ECB can make any level of inflation a reality, instantly, by simply committing to print the right number of euros for as long as it likes. This would lead to greater growth (as per DeLong's comment) by relieving the real debt burden on individuals and governments while simultaneously stimulating the spending-down of cash stockpiles (which we know are quite large). Because the problem is an excess demand for nonexistent money (Walras' Law), it can in fact be solved simply by printing more money.

    This is *not* a fairy because it has nothing to do with convincing people of something without action. The confidence fairy is a fairy because it depends on changing the expectations of a whole group to an alternative equilibrium without actually altering the facts on the ground. There is no equivalent here. The policy relies on expectations, sure, but it is no fairy because there is no magic - it is actually changing the equilibria, not trying to jump us from one to another.

  3. The ECB can make any level of inflation a reality, instantly, by simply committing to print the right number of euros for as long as it likes

    Wow the monetarist dogmatists really are fervent, aren't they?

    I reckon the Fed has "printed" quite a few dollars since 2008; funny about the inflation.

    the problem is an excess demand for nonexistent money (Walras' Law), it can in fact be solved simply by printing more money.

    More dogmatism. In a depression, expectations of the return on real investment have settled at a lower level, which may be correct given the lower expectations of other businesses. (I.e. there may be multiple equilibria.) In such a situation, it's perfectly possible to have unemployment and output below capacity, with all markets, including that for money, clearing.

    1. Data:

      Blue line is monetary base; red line is expected inflation as measured by the 10-year TIPS spread. Inflation is right where the Fed wants it, at about 2%, and when it crashed below that number in 2008 they dragged it right back. (Although other reports from Wednesday disagree about future expectations:

      And with Treasuries at the lowest rates, like, ever (one-month rates have been stuck at zero for three years:, I can't really see how to make the case that the money market is clearing.


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