What's with the US budget and recession stuff?

[giblets]

Here, Oerdin:

http://en.wikipedia.org/wiki/AD/AS_model

If nominal GDP falls below the historical trend, then aggregate demand is too low to achieve potential output.

[Ben Kenobi]

This is the point at which all increase in ngdp is due to inflation, and none due to real growth. The as curve is a plot of real output vs the price level, thus its slope goes to infinity at precisely this point.

Ok.

What's the slope at 5, 10, 15, and 20 percent interest?

How would your numbers changed if the CPI formula were the same one used in the Bush I era?

[Dinner]

Here, Oerdin:

http://en.wikipedia.org/wiki/AD/AS_model

If nominal GDP falls below the historical trend, then aggregate demand is too low to achieve potential output.

That is very helpful, thank you. So instead of the usual supply vs demand with the curve representing price we have price and output as axises and the curve represents supply, AD is (as I thought) aggregate demand and the inflection point of the curve represents potential output (which may or may not be realized). So until the point where the AS curve meets the potential output limit further increases in supply actually result in increases in AD (represented by the AD line moving to the "New AD" line. Correct? We can use this graph (assuming however we calculate the curve is correct) to easily model just about any any good or service but KH was using it to model increases in the money supply and how it effects growth in GDP vs Inflation, correct?

[giblets]

That is very helpful, thank you. So instead of the usual supply vs demand with the curve representing price we have price and output as axises and the curve represents supply, AD is (as I thought) aggregate demand and the inflection point of the curve represents potential output (which may or may not be realized). So until the point where the AS curve meets the potential output limit further increases in supply actually result in increases in AD (represented by the AD line moving to the "New AD" line. Correct? We can use this graph (assuming however we calculate the curve is correct) to easily model just about any any good or service but KH was using it to model increases in the money supply and how it effects growth in GDP vs Inflation, correct?

Oerdin, there is no inflection point on that curve. An inflection point is a point where the second derivative changes sign from positive to negative or from negative to positive. Price and quantity are always on the axes of a supply and demand graph. But yes, this is supposed to be a model of the consequences of monetary or fiscal policy.

[Tupac Shakur]

Good article...

Let’s Be Honest: We’re in a Depression, Not a Recession, And There’s No End In Sight

[Dinner]

I would never have taken you to be a TNR reader, Drake. I'm pleasantly surprised.

[Tupac Shakur]

Swiss National Bank

Ben Bernank

[C0ckney]

yes central bank intervention in currency markets is always extremely successful...

the peg is a desperate move by the SNB, who have been intervening without (medium/long term) success for a long time now, we've even seen negative interest rates! it was a last throw of the dice. the peg will soon create its own problems.

[Kuciwalker]

The peg was a brilliant move by SNB, who got the markets to go where they want just by telling the markets to do it. They'd previously tried other methods to lower the exchange rate which, yes, failed, so they just promised to keep printing CHF until the market obeyed. Lo and behold, the market did!

[KrazyHorse]

There is nothing stopping the scb from holding a floor on the exchange rate. Now, at some point ad/inflation will probably be driven high enough by the scb's policy that they will abandon it. Note that a central bank's ability to affect exchange rates is asymmetric; it can devalue its currency in an unlimited way, but cannot increase its currency's value in an unlimited way. I suspect cockney is thinking about the failed BoE attempt to defend the pound in 1992, which failed due to the finite fx reserves any cb has.

[C0ckney]

There is nothing stopping the scb from holding a floor on the exchange rate. Now, at some point ad/inflation will probably be driven high enough by the scb's policy that they will abandon it. Note that a central bank's ability to affect exchange rates is asymmetric; it can devalue its currency in an unlimited way, but cannot increase its currency's value in an unlimited way. I suspect cockney is thinking about the failed BoE attempt to defend the pound in 1992, which failed due to the finite fx reserves any cb has.

i was thinking more along the lines of what has happened in recent years, every time the swiss (and japanese) central banks have intervened to weaken their currencies. short term success but with no impact on the general upward trend, and at the same time incurring massive losses.

i think this move will create some problems. they started a similar policy in 1978 and abandoned it due to high inflation in 1981. inflation is one obvious risk. another is the carry trade, the (partial) unwinding of which is one of the causes of the higher swiss franc today. today you have negative interest rates and a pegged currency...sounds ideal for a bit of carry trading, no? also none of the factors which make switzerland a 'safe heaven' have changed, and now the SNB is promising 'unlimited' amounts, which is hardly going to depress demand.

[Kuciwalker]

If they abandon the policy when it is about to cause too much inflation then the policy will have succeeded.

Also, you're not making sense. There is a strong demand for CHF as a safe haven, therefore they ought to be printing more CHF to meet demand! Aside from satisfying the market's demand they can also reap the seigniorage income.

[KrazyHorse]

Cockney, there is a difference between the target variable of monetary policy and its objective function. The objective of the swiss central bank is macro stability. The target variable in this case is the exchange rate. In many times and places the target variable is short-term interest rates. Would you say that the central bank only had short-term success in achieving its goals because it changed the fed funds target?

The scb can defend this policy as long as they choose to with no possibility of failure. When their objective of macro stability requires a different value of the target variable they will change it.

[KrazyHorse]

The target variable of the central bank is just social convention. Most people and even some macroeconomists fail to understand this.

[C0ckney]

The scb can defend this policy as long as they choose to with no possibility of failure. When their objective of macro stability requires a different value of the target variable they will change it.

i don't disagree with this. it will work for as long as the central bank want it to, and it will have some beneficial effects, for example on the millions in central and eastern europe who have mortgages in swiss francs. however, what i am saying is that it will also create problems. namely that it will recreate the scenario which has been a major factor in the rise of the franc. there will be a new carry trade, and presumably with a larger amount of currency involved. when the central bank abandons the peg and the trade starts to unwind, the SNB will have the same problem as now, in fact probably a larger one.

this might be why the swiss central bank tried several other things to reduce the value of their currency in the previous months and years, before they implemented the peg. i would say that the SNB are fully aware of what is likely to happen, but consider a peg the least worst option. it's hardly a masterstroke (which was where i disagreed with kuci), more a move born out of being backed into a corner.