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
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Net debt as % of GDP
Belgium Italy Japan US