Paul Krugman

Paul Krugman @paulkrugman

Banks square this circle by offering people deposits that can be withdrawn at will, but investing most of the funds in illiquid loans to businesses etc. This normally works because not everyone needs cash at the same time 4/ — PolitiTweet.org

Paul Krugman @paulkrugman

The idea is that people want liquidity — ready access to their wealth if needed — but that productive investment requires tying up a lot of wealth in illiquid assets that can't be quickly converted into cash 3/ — PolitiTweet.org

Paul Krugman @paulkrugman

If you're a normal human being, the paper might not look simple or even comprehensible. But trust me: they wrote down more or less the simplest possible model of what banking does, why it serves a useful purpose, but why it's vulnerable to self-fulfilling panics 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

OK, some notes on the classic Diamond-Dybvig paper on bank runs, which exemplified the kind of economic analysis I've always loved: a (relatively) simple model that transforms your understanding, so that you'll never see things the same way again 1/ https://t.co/d41AvgijO1 — PolitiTweet.org

Paul Krugman @paulkrugman

What seems really clear is that pronouncements to the effect that we need an x percent rate of unemployment for one year or a y percent rate for three years or whatever to tame inflation embody a sacrifice ratio approach that hasn't worked for decades 12/ — PolitiTweet.org

Paul Krugman @paulkrugman

So, can we estimate the NIRU? Not well! A few months ago high vacancies and nominal wage growth seemed to suggest u* considerably above where we are now. But vacancies and wage growth have been coming down. We'll see 11/ — PolitiTweet.org

Paul Krugman @paulkrugman

In that case there's no need for a period of excess unemployment, of u>u*. We don't have a NAIRU; I guess we have a NIRU, for normal inflation rate of unemployment. And getting u to the NIRU, aka u*, is all we need 10/ — PolitiTweet.org

Paul Krugman @paulkrugman

Most likely explanation is that inflation expectations became "anchored", no longer reflecting recent actual inflation. And all indications are that they're still anchored. E.g., look at Michigan survey over time 9/ https://t.co/iTXLLMZ3tc — PolitiTweet.org

Paul Krugman @paulkrugman

Gonna put up that Stock-Watson picture again. The relationship between u and rate of change in inflation disappeared completely more than 20 years ago 8/ https://t.co/SY3q4R7r3B — PolitiTweet.org

Paul Krugman @paulkrugman

How much excess suffering? 1/b point-years of excess unemployment per point of excess inflation. That's the sacrifice ratio. An interesting if brutal concept. But also irrelevant to our current situation 7/ — PolitiTweet.org

Paul Krugman @paulkrugman

If you take this seriously, then there is a level of unemployment u* = b/a at which inflation is stable — the NAIRU. To bring inflation down you need a period in which unemployment goes above u* — a period of exceptional suffering. 6/ — PolitiTweet.org

Paul Krugman @paulkrugman

This sorta kinda worked up to the mid-1980s. See the blue lines in this figure from Stock and Watson 5/ https://t.co/kWbXwNFVTj https://t.co/UTPgKSoDGI — PolitiTweet.org

Paul Krugman @paulkrugman

But what determines expectations? Once upon a time, it seemed reasonable to assume that they reflected recent inflation. Simple version would have Inflation = a - b*u + Last year's inflation In which case Change in inflation = a - b*u 4/ — PolitiTweet.org

Paul Krugman @paulkrugman

Lots and lots of ways to criticize this — in particular, it's delusional to imagine that we have solid estimates of a and b — but the general idea that inflation depends on economic slack and expectations, other things equal, is reasonable. 3/ — PolitiTweet.org

Paul Krugman @paulkrugman

Many economists, myself included, have a working model of inflation that looks something like this (doesn't have to be linear): Inflation = a - b*u + expected inflation + other stuff where u is unemployment rate. Measures of "core" inflation try to clean out other stuff 2/ — PolitiTweet.org

Paul Krugman @paulkrugman

I'll probably write about the (much-deserved) financial crisis Nobel in tomorrow's newsletter (no col today). Right now some notes about inflation — specifically, why I'm baffled at economists who should know better talking about "sacrifice ratios" 1/ — PolitiTweet.org

Paul Krugman @paulkrugman

Back in 2010 I wrote "I’m very much a Diamond-Dybvig guy – that is, I think of financial crises in terms of the Diamond-Dybvig model of bank runs." 2/ https://t.co/cUmcsY4Z3f — PolitiTweet.org

Paul Krugman @paulkrugman

Now that's a prize lots of us will be happy to see. Fundamental work of huge practical importance — maybe even more as the ramifications of monetary tightening and the soaring dollar trigger more crises 1/ https://t.co/RNfDDq9Ore — PolitiTweet.org

Paul Krugman @paulkrugman

For some reason I’m not that productive this morning https://t.co/bLZqbYmkRh — PolitiTweet.org

Paul Krugman @paulkrugman

RT @GasBuddyGuy: no, $4 gas in Wisconsin is literally a byproduct of refinery outages, you also blame a political party for that flat tire… — PolitiTweet.org

Paul Krugman @paulkrugman

Yep. It's almost a ... Biden boom. Inflation has been a huge problem, but there has been a remarkable recovery in jobs. — PolitiTweet.org

Paul Krugman @paulkrugman

RT @Brad_Setser: Dr. Krugman has highlighted US trade and the J curve in the context of the "long and variable" lags associated with moneta… — PolitiTweet.org

Paul Krugman @paulkrugman

Memories — just six weeks ago https://t.co/MnykwzG4Fr — PolitiTweet.org

Paul Krugman @paulkrugman

You want to shoot ahead of a moving target, not behind it 14/ — PolitiTweet.org

Paul Krugman @paulkrugman

So even given a very mainstream view of how this stuff works, I see a strong case that the Fed has already done enough even if the most recent job numbers were strongish and inflation not yet down. 13/ — PolitiTweet.org

Paul Krugman @paulkrugman

Also good reason to believe that measured inflation will lag well behind economic cooling, if only because of issues involving shelter. 12/ https://t.co/VXFYMljWea — PolitiTweet.org

Paul Krugman @paulkrugman

I mean, do you really think we've seen anything like the full effects of the financial tightening that has already happened? 11/ https://t.co/2lWMPoId2M — PolitiTweet.org

Paul Krugman @paulkrugman

And the strong dollar will in fact exert a major contractionary effect on the US, but not for a number of months yet. The other major channel is through housing. And surely there are significant lags there too 10/ — PolitiTweet.org

Paul Krugman @paulkrugman

Personal background may matter here. My macro roots are in international, where we've always known that there are long lags in the effect of exchange rates on trade flows, leading to phenomena like the J-curve 9/ https://t.co/hFv4on7nVX — PolitiTweet.org

Paul Krugman @paulkrugman

Personal background may matter here. My macro roots are in international, where we've always known that there are long lags in the effect of exchange rates on trade flows, leading to phenomena like the J-curve 9/ https://t.co/hFv4on7nVX — PolitiTweet.org