John H. Cochrane: The Grumpy Economist


 

Last week I saw Johannes Wieland’s paper “Are negative supply shocks expansionary at the zero lower bound?”  A side benefit of the job market season is that we see interesting new papers like this one, and it contributed to my project of trying to better understand new-Keynesian models.
Though starting academic papers with blog quotations is usually a bad idea, Johannes starts with a great and very appropriate one,

As some of us keep trying to point out, the United States is in a liquidity trap: […] This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment.” –Paul Krugman

I endorse this quote, because it is an accurate and pithy description of the properties of many careful new-Keynesian analyses in the academic literature.

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The Grumpy Economist

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