The Keynesian Illusion

5 commenti (espandi tutti)

On the demand of something changing the supply of something else, this is certainly true in a general equilibrium setting, but you can still point out the difference between a demand and a supply shock. The economy is full of intermediate interactions, with intermediate goods flowing through an input-output matrix in a sequence of your-supply-is-my-demand. But at the end, at the aggregate level, you can single out final consumption on the demand side, and value added on the supply side. Of course, even at this stage final consumption by households depends on their income, which is affected by labor demand. However value added depends on other factors of productions as well.

So, for instance, when OPEC imposed an oil embargo in the 70s, the input of a natural resource in the production function fell. Output then falls in real terms. Is that a demand shock, because labor demand falls as a consequence? No, it is an adverse supply shock, and in this case a Keynesian expansionary policy would be useless. It would just create inflation and have no effect on real output.

But we cannot say the same when facing a demand shock, that is when inventories are there but private demand is missing for whatever reason. Perhaps due to justified excess savings, but still. If I bring to the market 10 bananas and I sell only 5, real GDP is 5 bananas. If the government buys the other 5 bananas in exchange of IOUs, real GDP jumps to 10 bananas. It might be unjust, inefficient, uncalled for, but when facing a demand shock it can potentially bring real GDP back up (provided I have excess inventory of bananas). With a supply shock (I lost 5 of the 10 bananas on my way to the market) there is no way you can bring real GDP back up to 10, no matter how many IOUs you print.

In conclusion, I personally doubt that even when facing a demand shock, a government stimulus plan can be effective in practice, but in theory it can. That's why I think when Levine used a supply shock example to debunk Keynesian policies, he was barking up the wrong tree.

after writing down my thinking, I am now having some second thoughts about some portions. I will leave it and sleep on it

I agree

michele boldrin 29/3/2015 - 05:57

So let's take time to think about it. In particular

- do not confuse national income accounting conventions with "behavior": VA is the effect of "demand" (of factors) as much as C+I is "supply" (of goods) ... and they are always equal because of the individual budget constraints.

- when demand for a good goes down respect to expectations this may be due to MANY things: wrong expectations, wealth shock, a shock to productivity, a change in tastes, a change in relative prices ... and so on.  

A me non e' chiaro da dove vengono I 5 che il governo spende per comprarsi le banane. Sono maggiori tasse? In tal caso la domanda verra' ridotta da qualche altra parte e il gdp complessivo non cresce, no?
O sono soldi stampati? Ma in questo caso non si genera inflazione, che mi sembra funzionare come una tassa implicita?
Magari non ho capito e sono domande stupide.

si, puoi interpretarla in diverse maniere. IOU's sarebbero in pratica bonds, ma puoi anche interpretarli come moneta. A prescindere c'e' un tradeoff, aumenti G oggi, indebitandoti. Il deficit va su, e quindi il risparmio pubblico cala, e di conseguenza il risparmio nazionale (pubblico piu' privato) cala. In sostanza se il calo di domanda per le banane e' sceso per colpa di meno C e piu' risparmio privato, compensi artificialmente con risparmio pubblico negativo. Ovviamente c'e' un tradeoff intertemporale e non vuol dire che conviene, ma nell'immediato puoi aumentare il Pil reale (non nominale) se questo potenziale c'era (le banane extra in inventory)