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Old 11-06-2011, 08:44 PM
T.G.G.P T.G.G.P is offline
Join Date: Nov 2006
Posts: 278
Default Re: The Big Interview (Karl Smith & Kelly Evans)

Originally Posted by karlsmith View Post
People say this - about Greece - but I haven't seen the data to back it up. IMF has them achieving primary balance by 2013. What is the justification for saying they couldn't make it besides the borrowing costs.

I think the difference via Italy is that if Italy was austere enough, in theory it could service is debt at market rates. This is simply not an option for Greece. They cannot service their debt at market rates, so unless the ECB steps in they are toast.
Maybe you're right.

When Karl questioned Kelly about a recent run-up in inflation she mentioned gas & food prices. But that sounds like a shift in relative prices rather than the general price level. The former indicates a possible negative supply shock, the latter would indicate a positive (not meaning good, meaning more than zero) demand shock. Monetary policy targets demand.

I think though that Karl might be too dismissive of the claim that inflation can reduce real GDP. I've heard some say that it's through a tax on capital, but one could also use the classic New Keynesian mechanism of menu costs*. More price changes means more GDP wasted on changing menus. Not the end of the world, but not zero.
*Yes, it's not entirely considered to be the real explanation by Ball & Mankiw, but close enough to explain why prices don't instantly adjust.

Keynesian fiscal policy works by increasing AD/NGDP/inflation. The same as monetary policy, it does not directly target real growth. The difference is the mechanism used (Congress vs the Fed) and the ability to undo policy if it turns out we've overreacted.

Last edited by T.G.G.P; 11-06-2011 at 08:54 PM..
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