Comment of the Day: Robert Waldmann: Paul Krugman Looks Back at the Last Twenty Years of the Macroeconomic Policy Debate: "2a) I think Paul Krugman was wrong. b) I had conceded that he was right as always. c) now I'm back. It has to do with the expected inflation imp...
...Krugman discussed a central bank which could credibly promise to be irresponsible in the future when the economy is out of the liquidity trap. I don't like the use of "credibly". The question is what promises are credited by economic agents. The identification of "credible" and "credited" is part of the damage done by the rational expectations assumption. Agents' beliefs about policy are described as an aspect of the policy. It is insinuated that a central banker with resolve, character, integrity determination and a pre-commitment facility, can make people believe anything.
Krugman has never asserted that his proposed monetary definitely would work if tried. He always argues that it might work and fiscal stimulus is clearly politically impossible. But he does try to claim it would work if only central bankers followed his advice.
His problem is Kuroda, who did everything as Krugman advised and was determined to do whatever it takes to get to 2% inflation. From 2015 through 2017 Japanese consumer price inflation fluctuated rought from 0.5% to -0.5%—the only way they got CPI inflation was raising the value added tax (VAT) rate (and causing a recession). I now think the data which convinced me Krugman was right were due to Japanese realizing that Abe was really really going to raise the VAT.
Agents' expectations are not an instrument of policy. Central bankers try to use the "expectations channel" but it usually doesn't work. More here: https://angrybearblog.com/2018/03/a-comment-on-the-return-of-its-baaaack.html
Also, as noted by our Advisor, Krugman assumes that everything will return to normal in the long run. He analyses 2 periods, the present and the long run, and the long run is assumed to include full employment. He has trouble modellings secular stagnation. We must walk through the valley without the long run as our shepherd http://rjwaldmann.blogspot.it/2015/06/delong-praises-long-run.html
Also dreadful plumbing in a pdf here http://bit.ly/1cBYU0x