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Understanding Martin Feldstein's Econ 2010c Lecture 34 Years Late: "Light Dawns in Marblehead" Weblogging...

FRED Graph St Louis Fed 6

Back in the fall of 1979 in his last lecture for Econ 2010c Martin Feldstein said that one of the Keynesian arguments was that economies could get wedged in a situation of high unemployment and slack demand because of "badly behaved functions". Normally, he said, market adjustment processes should work so that slack demand was an excess of ex ante savings over investment, which would lower real interest rates, which would lower the value of the currency, and these would boost the interest rate- and exchange-rate sensitive components of investment like exports and construction and that would push the economy back into full-employment balance. But, he said, badly-behaved functions could make it so that real interest rates did not fall far enough in any reasonable time, or interest- and currency value-sensitive components of spending did not rise far enough fast enough.

I did not understand what he was saying then. I certainly do understand it now.

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