Sunday, April 22, 2012

Salerno in a Smackdown of Krugman

Paul Krugman writes:
...there is actually a standard definition of the natural rate of interest, coming from Wicksell, and it’s basically defined on a PPE basis (that’s for proof of the pudding is in the eating). Roughly, the natural rate of interest is the rate that would lead to stable inflation at more or less full employment.
Joe Salerno responds:
Wicksell did not formally incorporate the concept of full employment into his definition. For Wicksell the natural rate was either the rate at which, under barter, the real supply of capital goods would equal the real demand for capital goods. In Wicksell's words, the natural rate was: "a certain rate of interest on loans which is neutral with respect to commodity prices, and tends neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods." Now I guess in some sense Wicksell stated from a notion of a normally functioning market economy tending toward full employment of resources, but this was an initial assumption of the analysis and not a defining condition of the definition of the natural rate. Krugman always makes stuff up.

2 comments:

  1. What kind of emotional child is always looking around the Internet for "smackdowns"? You had that mathematical crank "smacking down" Bob and me when we were right; and now you have Salerno misreading Krugman as a "smackdown" as well. Krugman didn't say "Here is Wicksell's definition," he said this definition "comes from" Wicksell: it can be modified along the way.

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  2. They are simply contradicting each others points. One thing they should have been clear about is whether these "smackdowns" can neutralize commodity prices.

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