MOAR Musings on Whether We Consciously Know More or Less than What Is in Our Models...

A Semi-Platonic Dialogue About Secular Stagnation, Asymmetric Risks, Federal Reserve Policy, and the Role of Model-Building in Guiding Economic Policy

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Sokrates: You remember how I used to say that only active dialogue--questions-and-answers, objections-and-replies--could convey true knowledge? That a flat wax tablet covered by written words could only convey an inadequate and pale simulacrum of education?

Aristoteles: Yes. And you remember how I showed you that you were wrong? That conversation is ephemeral, and very quickly becomes too confused to be a proper educational tool? That only something like an organized and coherent lecture can teach? And only something like the textbooks compiled by my lecture notes can make that teaching durable?

Aristokles: But, my Aristoteles, you never mastered my "dialogue" form. My "dialogue" form has all the advantages of permanence and organization of your textbooks, and all the advantages of real dialectic of Sokrates's conversation.

Sokrates: How very true, wise Aristokles!

Aristokles How am I to take that?

Xanthippe: You know very well: as snark, pure snark. That's his specialty.

Hypatia: This is all complicated by the fact that in the age of the internet real, written, permanent dialogues can spring up at a moment's notice:

Sokrates: And with that, let's roll the tape:

All in all, we are splitting hairs extremely finely here. Summers reiterates that the concerns he raises in which he disagrees with Krugman do not apply to the U.S. today. Krugman reiterates that his claim applies only to first-world economies that borrow in their own currency and are in a liquidity trap. Blanchard et al. note that it does appear as though capital outflows are expansionary and capital inflows contractionary in rich North Atlantic economies.

The only question at issue is: whether or not it is conceivable that, in a liquidity trap, in a country with well-developed financial markets, an adverse shock to "confidence" could (a) raise the spread between the short-term safe nominal interest rate i on the LM curve and the long-term risky real interest rate r on the IS curve by (b) enough to create a contractionary impulse that (c) would more than neutralize the expansionary impact of the rise in net exports produced by the confidence shock-driven rise in next exports. Krugman has a simple, transparent model and says that it is conceivable only in the event of a full-fledged banking crisis. Summers says that it is conceivable in general, even though he cannot build a simple transparent model in which it is the case.

Other things linked to that are highly relevant and worth reading:

Things I did not find and place outbound links to, but should have:

  • Polya
  • Dennis Robertson
  • Donald Patinkin

Looking at the whole thing, I wince at how lazy people--especially me--have been with their weblog post titles. I should find time to go back and retitle everything, perhaps adding an explanatory sentence to each link...