Hi Terence,

Indeed, Mankiw said the same thing. However, this is a marginal argument on money printing – not a global argument.

If prices aren’t chaning, and we keep printing money, the incentive to hoard is going to fall as more money is printed. If we just keep printing and printing, eventually people will spend it. Either this will push prices up, lead to an increase in output, or (more likely) a mix. So we can just keep printing, and printing, and printing, until something happens 😉

“In my mind one of the most important reasons to be open to some form of fiscal stimulus/deficit spending in a recession is simply the need to mitigate the social costs of these events”

Agreed – and I feel that this is the primary reason why we have the type of automatic stabilisers in place that we do 🙂

In my mind one of the most important reasons to be open to some form of fiscal stimulus/deficit spending in a recession is simply the need to mitigate the social costs of these events. Recessions mean less government revenue at the same time as they bring increased need for government services (particularly welfare). If running a deficit means you don’t have to cut these services when people need them most, and if it isn’t going to dramatically slow recovery or lead to long run issues of repayment, then that’s reason enough to do it in my mind. Any stimulus is a bonus.

“I have been reading a lot of Krugman’s views lately, though I don’t necessarily agree with what is said (esp in the NZ context), he nonetheless has a particularly interesting viewpoint.”

Very true. Krugman is a very smart man – although I find he can be a bit aggressive with some people who disagree. I think he talks with political barriers in mind a lot of the time.

The good thing with Krugman is he understands open economy macro – something many economists in the US just miss out!

“the difference in lags is more related to how much debt is on fixed or floating rates”

Steve. That is definitely true regarding the income impact of lags – which is part of the stabilisation mechanism.

However the “marginal impact” does not really matter on current terms – because we are looking at the marginal borrower. In that sense, adjusting the OCR can still have a good impact at helping smooth intertemporal consumption in this sense.

the difference in lags is more related to how much debt is on fixed or floating rates. i.e. if it were al floating I doubt the lag would be much at all, whereas if it is all fixed there could be a significant lag. then again, maybe people would spend less almost immediately because they have an expectation of future higher interest rates.

I am not entirely convinced there is much of a lag either.

Excellent point Seamus. I had missed that third, central, element of the debate around stimulus.

As you say in your critique of it, it isn’t clear whether the practical lag is any shorter. In fact, I am not entirely convinced on the lag argument myself.

Actually, I am currently a LOT less convinced about the difference in lags than I was during the crisis:

http://www.tvhe.co.nz/2008/12/11/make-expansionary-fiscal-policy-work-give-it-to-the-technocrats/

Hmmm, interesting 😀

3. They believe that an immediate aggregate demand stimulus would be beneficial and fiscal policy operates more quickly than monetary policy.

For myself, I don’t buy any of the three arguments.
1. Wanting higher government spending is an argument for higher government spending period, not for counter-cyclical government spending.
2. Even if a liquidity trap could make monetary policy impotent in theory, in practice, we only ever see very shrot-run interest rates approaching zero. As long as the central bank has open-market operations for securities with longer maturity horizons in its policy-level aresnal, low overnight rates should not be a constraint.
3. Fiscal policy may well operate with smaller lags, but that also makes it a very unwieldy instrument to use to fine-tune demand as it implies large swings in government expendtiure and taxes.