Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Two typical gaps that people would use are the difference with potential output, and with 'natural' output.

Well, obviously you use potential output, since there is no convincing theory of "natural" output, let alone a reality-based way to estimate it.

OK, I see  - you are speaking about current environment, where, following your own definition, output gap is large in magnitude and negative.

Yeah, when I talk about "output gap" I talk numerical values, since output can hardly exceed capacity for any length of time together (if it does, you would appear to have misestimated capacity).

And no, the persistent glut isn't assumed away, not in NK environment for sure.

I have a few textbooks that say differently. Highly regarded too. State of the art, used by at least one Very Serious University's department of Economics, which is staffed by Very Serious People, who all swear by long-run money neutrality (at least when they talk to the students).

I'd put the finger for the current problems differently - lack of demand, with one of the reasons a desire to re-balance.

That is a good description of the last few years.

But we have had substantially less than full capacity utilisation for the last thirty or so years. So clearly there is a longer-term problem which is not caused by the panic of 2007, unless cause is no longer required to precede effect.

There is no objective function which does that. See Mig's sig.

More seriously, yes, there is - the one in Walsh, taught to undergrads, even.

This amounts to saying that because you can write a policy with Greek letters, it becomes objective. I think most social scientists would take issue with that.

Be that as it may, the arguments for requiring a hard-and-fast rule for interest rate policy are, well, less than compelling.

You have an implicit model in your head which is very different from the ECB one.

Yes. That fact was established some months ago, when the ECB insisted that the private debts of private Irish banks should be borne by the Irish taxpayer. A decision which it has pursued with a naked blackmail that exceeds even the most generous reading of its mandate.

I'm not sure any model on fiscal-monetary policy interaction in a monetary union would lead to your prescriptions.

As Keynes pointed out at Bretton Woods, any fixed-rate currency regime requires either an automatic mechanism to limit foreign surpluses, an automatic mechanism to recycle them, or both. These requirements arise from simple national accounting relations, so unless you wish to abolish double-entry bookkeeping, they are not particularly negotiable.

Absent explicit fiscal transfers, the easiest way to accomplish the same thing is with implicit fiscal transfers. By printing money for deficit countries to pay the surplus countries with.

None of this should be terribly controversial. We have already had three fixed-rate currency regimes blow up for precisely this reason (four if you count the various Latin American attempts to peg to the US$). It beggars credulity that the ECB is incapable of grasping such a simple fact. But I suppose we'll simply add the Eurozone to the list of cautionary tales one of these months.

but, again as a professional, I shall do anything I could to prevent such event, no matter what I might be thinking about the ECB monetary policy at the moment.


Central bank independence does not seem to have done anything good for the economies where it has been practised.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:36:40 AM EST
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