Nick Rowe: The 1 vs 3 Model of Quick Recessions vs Slow Recoveries: "Business cycles are not symmetric; if you flipped the time-series data upside-down the fluctuations would look different...
...It's as if there were some "normal" level of economic activity, and the economy sometimes falls below "normal" temporarily, by greater or lesser amounts, but rarely rises much above "normal". Recessions are bigger than booms. Big news is usually bad news.... Why? Here's a story (I think it makes sense):
A simple model of a monetary exchange economy is the Wicksellian Triangle. The apple producer wants to consume bananas; the banana producer wants to consume cherries; the cherry producer wants to consume apples. But it's hard to coordinate 3 people meeting in the same place at the same time so they can do a 3-way swap in the central Walrasian market. They can only meet pairwise, so they have to use money. And let's suppose they use some 4th good as money (because my story is simpler that way). So we have a circular flow of money clockwise around the Wicksellian triangle; and a flow of fruit counterclockwise.
It only takes 1 person to reduce the circular flow of money. If the apple producer decides he wants to hold more money, he can unilaterally decide to slow down or stop spending his money. He does not need anyone else's consent to do this; because exchange requires mutual consent. Quantity traded is whichever is less: quantity demanded; or quantity supplied. The change in his stock of money equals the flow in minus the flow out; he needs the cherry producer's consent to increase his flow in, but can reduce his flow out to the banana producer unilaterally. And if the apple producer decides to slow down or stop his spending, the whole circular flow of money and fruit slows down or stops too. The circular flow of money is like an "O-ring" model; a chain is only as strong as it's weakest link.
>It takes all 3 people to increase the circular flow of money. The apple producer needs to spend more quickly, the banana producer needs to spend more quickly, the cherry producer needs to spend more quickly. (And each of those 3 decisions requires the mutual consent of both parties to the trade of money for fruit, because the apple producer cannot buy more bananas unless the banana producer agrees to sell more bananas. And only if all 3 have an excess supply of fruit matched by an excess demand for money will that consent be readily forthcoming.... The supply-side will usually not be a constraint in a recession, or if the economy is monopolistically competitive, which it mostly is. The circular flow of money is like 3 cars circling a one-lane roundabout, they all need to go faster for any one of them to go faster.... The same thing applies if we take the derivative with respect to time and talk about the rate of acceleration.... The rate of deceleration of cars on the Wicksellian roundabout is determined by the rate of deceleration of the car whose driver wants to decelerate the most; the rate of acceleration of cars on the Wicksellian roundabout is determined by the rate of acceleration of the car whose driver wants to accelerate the least.... The Wicksellian triangle is really a many-sided Wicksellian polygon... 1 vs n rather than 1 vs 3...
#shouldread
