Interest Rate as Policy Choice, Exchange Rate as Degree of Freedom

In the previous post, I discussed a short paper by Paul Krugman on the “invisible bond vigilantes” and noted convergence, on the issue, to the position of modern monetary theorists. Briefly, the bond vigilantes, in the view of both Krugman and modern monetary theorists, are not so much an “invisible” as a nonexistent threat to nations that satisfy four conditions:

1. The government is a currency issuer;
2. The exchange rate floats;
3. The monetary authorities set the interest rate;
4. The government avoids borrowing in foreign currency.

Under these conditions, as Krugman points out, there is little reason to expect a loss of confidence in the currency, but if there were, the impact would be more favorable than in the case of nations operating under fixed-exchange-rate or common-currency arrangements. For non-economists among us, this point seems worthy of elaboration.

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Paul Krugman Synthesizes a Little More MMT

Paul Krugman, in “The Simple Analytics of Invisible Bond Vigilantes (Wonkish)”, has lent his support to the view, emphasized by modern monetary theorists, that bond vigilantes cannot impede a sovereign currency issuer. Krugman has made this important observation in the past, but this time he spells out his reasoning, step by step, and the key points align closely with that of modern monetary theory (MMT). To illustrate his reasoning, Krugman links to a short paper, which includes a simple model he put together while in the air, perhaps somewhere over water between lands Neoclassical Synthesis and Modern Monetary Theory. The model is of the IS-LM variety, so some may prefer to look away while reading. Nevertheless, the potential for an advance in public understanding seems significant. Some people may be more inclined to adopt this better understanding of currency sovereignty thanks to Krugman lending his weight to it.

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A New Home for Disgruntled Conservatives?

The non-occurrence of a Romney landslide and re-election of Barack Obama in the US presidential election has caused angst in right-wing circles. Any thought by liberals of moving to Canada has been put on hold. It is now disaffected conservatives looking for a new home. In view of the domino-like spread of communism across the globe — I would say, universe — over the past three or four days, in anticipation of Obama’s re-election, it may seem that there are very few promising avenues for such emigres to pursue. I wonder if they might like to consider my home?

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Not Even Rational Fools

I have given some thought (about two minutes) to what is wrong with the economic theory that gave us the Great Moderation, with its eternal promise of no worldwide flood ever again, only the colors of rainbows. The temptation for theorists, in seeking a way forward, is to throw the baby out with the floodwater, and then the ark at the baby. But perhaps that would be a mistake. Perhaps the ark could be salvaged if a simple genetic modification were made to the baby. It has been customary to suppose that this baby is a rational human being, and moreover that this rational human being is representative of other human beings. Now, in all honesty, who here among us can claim to be represented by this?

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