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Third-best macro policy
Paul Krugman
Nov. 2009
World industrial production
0
0.5
1
1.5
2
2.5
3
3.5
4
1940 1950 1960 1970 1980 1990 2000 2010 2020
Long-term unemployment as % of labor force
Thinking about policy: minimal NK framework
where C is private consumption, G gov’t purchases.
“Fudge factor” to get shock to aggregate demand.
Sticky prices (one period) to get output fluctuations
C+G
Nominal interest rate
Fullemployment
AD
Target rate
The normal case
C+G
Nominal interest rate
Fullemployment
AD
Target rate
The current situation
0
What to do?
First best: Inflation targeting to reduce the real interest rate
Problem: Persuasion/credibility
Second best: Strong fiscal expansion/quantitative easing
Problem: Deficit/inflation fears
Third best: Job promotion/work sharing
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
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91
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92
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97
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01
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20
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Net debt as % of GDP
Belgium Italy Japan US
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