Krugman’s blog, 5/6/13

Just one post yesterday, “Exchange Rates and Austerity:”

Brad DeLong saves me the trouble of responding to Alan Reynolds.But I’d like to enlarge on one substantive point.

Quite often, austerians point to some example of a country that engaged in fiscal austerity yet experienced a strong economic recovery,and claim that this is a refutation of Keynesian views. Usually, however — not always, but usually — it turns out that the real story is that these countries experienced large currency depreciations, so that they could have export-led recoveries despite domestic austerity.

Let’s use the BIS data on real effective exchange rates to look at two examples: Korea in the late 1990s, and Iceland more recently. Korea:


Two points: First, for euro area countries that must rely on internal devaluation, real depreciations on this scale would be inconceivable, requiring devastating deflation. Second, the whole advanced world is in a liquidity trap these days — and we can’t all massively devalue against each other.

So invoking cases like these as if they have something to do with the fiscal policy debate is either ignorant, disingenuous, or both.


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One Response to “Krugman’s blog, 5/6/13”

  1. W. F. Says:

    On Keynes and B. Bartlett: In haste economists like fraternal buds r everlasting foes of friendship. Quick to grasp the delicate differences in subjects they rely on terminology. Throw in a curve and we’re done. Their attempts to fix the economy become mere rhetoric.

    As to the trap. Now a wonk would say the average person saves during a “downturn” and so monetary policy fails to raise interest rates as one would anticipate in a General Theory. Now Einstein has something grounded in provable ideas and no one is saying there are none in metaphysical economics. But to say they are provable and yet none applicable is to say we quit. We want to write long winded sentences rambling on about the nonsense of trying to fit a large bolt in a small circumference.

    Now Mr. Bartlett may be right. Lo tho he may not be said to be wrong nor his friends. But is monetary policy concerned with interest rates or an expanding economy? When one loots the bank account and it is invested in losing causes does it disappear and since it doesn’t has the value decreased because interest rates are lower? The market disagrees completely and utterly and laughs with disdain.

    The problem is not issuing the money it’s how it is used and whether it expands the economy or as the currency says does it create or inhibit job growth? We can point to the commodities market for proof of the fallacy of the liquidity trap and in fact it has nothing whatsoever to do with general theory. By which I mean they have disregarded the efficacy of opportunities. To which they may point back tot their tired paradigm and show that the box is the same. Nonsense.

    Businesses hire MBA’s to consult. Governments hire economists to make analytical explanations of the worth of ideas. Perhaps what frustrates the conservatives is that a homosexual is smarter than them?

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