book advocating monetary economics

Hi, I'm really interested in the economic debate of Keynes Vs. Monetary Policy and in particular whether of not fiscal stimulus works.

I'm reading Skidelsky's 'Keynes: The Return of the Master' which obviously is in favour of fiscal stimulus.

Can anybody please recommend me a book which is against the idea of fiscal stimulus please?

Thanks!

Reply 1

economyst

Original post by wachno

Austrian Economics is very free market. People like Ludwig Von Mises, Hayek, Rothbart and other. They have an institute called the Ludwig Von Mises Academy, visit that for material on free market and against intervention.

They have a lot of videos promoting the Gold Standard, less printing money, less government spending so I would probably recommend that.

Reply 2

wachno

Original post by economyst

any books you would recommend?

I think I'm going to read Milton Friedman's 'capitalism and freddom'

Reply 3

dreadnaut

Monetary economics and fiscal stimulus arent opposites.

If you're not at degree level I'd avoid reading about these things. It'll just be all hot air and muscular rhetoric that may seem to be founded in logic but just ends up causing people to fall for old fallacies.

"The central bankz are printing the mooniez! Weimar republic here we come!!" etc.

If you want to learn macro, buy "macroeconomics" by blanchard and study that instead

Reply 4

wachno

Original post by dreadnaut

I should have phrased it better. The actual issue I'm interested in is the debate on whether fiscal stimulus works or not.

Reply 5

dreadnaut

Original post by wachno

I should have phrased it better. The actual issue I'm interested in is the debate on whether fiscal stimulus works or not.

You're wading into the ricardian equivalence debate there. Which is to do with friedman's permanent income hypothesis. The long short of it is RE requires some rather heroic assumptions to hold true (agents are rational, infinitely forward looking, can process and calculate with all information availible to them, are not credit constrained and some others).

Evidence is mixed. Some economists find evidence to support the view that government deficit spending and the future taxes it implies are incorporated into consumers expectations and so gov spending increases are 1:1 off set by a fall in consumption, but like I say this requires the near impossible assumptions to be true.

But when I say mixed it isn't an even 50:50 ratio of for and against evidence. The Ricardian set up is the theoretical ideal. Like finding perfect euclidean geometry in nature. Reality has a habit of being messy and far more complex than economists model. Its more like a few find selective instances of consumers being ricardian, and a barrage of papers rain down finding potential flaws or other evidence that RE doesnt hold. It highlights the gulf between what is theoretically impressive (tons of maths and algebra) but an inaccurate description of reality and what is actually happening.

AND

Even in a ricardian world, a temporary fiscal stimulus is still justified as the tax burden can be spread through time, so the future tax burden and reduction in consumption are far smaller than the rise in government spending, so aggregate spending will increase.

You might be interested in the debate around rational expectations, bounded rationality and cognitive biases which relate to the idea of anticipated taxes.

TL;dr: Temporary (credible) stimulus works; Permanent increases in G might fall victim to ricardian equivalence.

If you want to get REALLY technical then you need to go into long-term models like Over Lapping Generations (OLG) and endogenous growth theory

(edited 12 years ago)

Reply 6

wachno

I'm reading Keynes- the return of the master by Skidelsky. Also I will read Friedman's 'capitalism and freedom'. I attended the iea annual Hayek memorial lecture by Robert Barro who is one of the key people with Ricardian Equivalence. I hope that after that I will have some of my own opinions.

You seem reasonably knowledgable. Do Uk universities generally teach classical or new keynesian economics?

Reply 7

dreadnaut

Ill try and explain it as well as I can: intro micro everywhere will be "classical" - market clearing, walrasian equilibrium, that sort of thing. Supply and Demand, rational consumer choice between 2 goods, 2 periods of time, 2 states of the world etc. Macro that is taught in most places follows books like Blanchard's Macroeconomics (He's a big cheese in the macro world). The book is standard right across the academic world. The Macro it teaches is New Keynesian. But Keynesianism and New Keynesianism are two separate entities.

New Keynesian is a synthesis of the old classical clearing-markets/equilibrum stuff, and keynesian ideas of depression prevention through policy intervention through monetary policy. When that fails there is an intellectual case for fiscal stimulus as well should monetary expansion not be enough to sufficiently fight the threat of recession. If makets did always clear we'd be in that classical set up where theres no space of interevention and markets know best. In reality there are numerous mechanisms barring the achievement of such equilibria and a spontaneous balance.

One such issue is nominal price rigidity - prices are sluggish to adjust (especially downward) e.g. giving rise to excess unemployment and an output gap.

Various "toy" games of game thoery can be used to explain other undesirable outcomes occuring naturally.

I'd highly recommned you read John Kay's "The truth about Markets" it sets out the classical model in the first half and then goes on to critique in the second half.

Virtually every model used by central banks to conduct monetary policy will be called "new keynsian". New Keynsian is the assimilation of all that has gone before it (the classical, monetarism and some elements of Real Business Cycle theory)

Or thats how I see it. My apologies if Im incoherent....long day at work. Basically the Kay book will spell it clearly.

The only school of thought that is still in the "policy can't do anything" camp are Chicago. People like Robert Lucas, Barro, Cochrane and Fama. They seem to be sticking to their RBC ideology adamantly. So when I said everywhere uses Blanchard I meant everywhere except Chicago (and the "freshwater" school).

SO again TL;DR = all good unis will teach you all the theories which will culminate in new keynsian models, as well as the RBC theory.

PS. On a much lighter note, you might like this: http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2011/08/humans-and-incentives.html

(edited 12 years ago)

Reply 8

wachno

Original post by dreadnaut

just finished reading Keynes: the return of the master. I was interesting how he thought the economic models being used do not account for uncertainty. However, I was disappointed with the lack of points on fiscal stimulus. Any other books you could recommend?