Sunday, December 21, 2008

Depression economics vs non-depression economics

Fine economists have been discussing depression economics at the TPMCafe. Brad DeLong defines "non-depression economics" as that following these rules:
  • Short-run economic policy should be left to the central bank--the legislature and the executive should focus on the long run and keep their noses out of year-to-year fluctuations in employment and prices.
  • The highest priority for central banks should be to maintain their credibility as guardians of price stability.
  • Once that highest goal has been achieved, central banks can turn their attention to trying to keep the economy near full employment.
  • They should try to keep the economy near full employment by influencing asset prices--pushing asset prices up when unemployment threatens to rise, and pushing them down when an inflationary spiral appears on the horizon.
  • Central banks should influence asset prices through normal open-market operations--by buying and selling short-term government securities for cash, thus changing the safe interest rate and the price of longer-duration assets.
  • Central banks should stand ready to intervene to prevent bank runs. Otherwise, central banks should let the financial sector run itself with a light regulatory hand--financiers can take care of themselves, and the central bank should view itself not as chaperone or duenna but rather as the designated driver in the case of financial speculative excess.
Depression economics is therefore the negation of all above. In situation of crisis like this, it is the latter that applies, not the normal rules.

No comments: