Abstract
In Cambridge, England, as you walk up King’s Parade keeping that late-medieval architectural gem, King’s College Chapel, to your right, you will come to a fairly nondescript lane known as King’s Lane.
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Notes
- 1.
Cambridge is a highly recommended visit. This famous and exquisite university town, tracing its history to well before the Roman conquest, has a distinct “rural feel” which adds to its charm.
- 2.
The author remains grateful to Professor John Cathie of Cambridge University for pointing out “the window.” This momentous event occurred soon after the Rutgers University Executive MBA students had just attended a private harpsichord recital by the renowned Dr. Gerald Gifford at King’s College Chapel. The window is now a favorite pilgrimage destination during the annual Rutgers visit. While controversy swirls around the “authenticity” of the story pertaining to Keynes’ office, the fact remains that Keynes is still considered to be one of our most globally influential and intriguing macroeconomists, and that he did indeed make history while at Cambridge.
- 3.
Here steps 3 and 4 of the survival guide are different from those of the Classical model. While prices may have changed, we do not bother going back to “adjust” the LM, even though technically the LM will shift with a change in P. The crucial effects here, namely the changes in P and in Y, are indeed captured and reflected by the model in its diagrammatic analysis. Incorporating the final LM shift would make a diagrammatic representation somewhat intractable. While purists may disagree, the final twitch in LM does not add any additional value from a macroeconomic policy perspective, and is disregarded here in the interest of pedagogic convenience.
- 4.
In a later exercise in this chapter, we will examine why these policies have not been nearly as successful as the one in the example just discussed.
- 5.
The exact mechanism by which the major central banks change the money supply will be discussed in the Chap. 11.
- 6.
Recall that other instruments are cuts in taxes and, of course, increases in G, both of which take much longer to implement, given the necessary approval processes in government. On the other hand, monetary policy, especially in an economy characterized by an autonomous central bank, can be enacted very rapidly without being hindered by a lengthy and debate-ridden approval process.
- 7.
Here the overheating is being caused by relentless monetary stabilization. It needn’t always be the case. The overheating could also be caused by excessive fiscal stimulus in the form of mammoth and ongoing increases in G and/or huge tax cuts, or some combination of all three “policy buttons.” Finally, an “irrational exuberance” could also trigger overheating. Increases in the confidence parameters (perhaps in conjunction with any of the policies cited here) will also shift the IS remorselessly to the right, resulting in the AD being pushed towards the kink.
- 8.
The interest rates in ISLM space are short-term rates. Soon we will examine the effects of these policies on long-term rates when we revisit the role of expectations in the Fisher effect.
- 9.
A good example of this exercise is Japan in the 1990s and early 2000s. The case of the US Fed with its massive Quantitative Easing program from 2008 to 2015 would be the perfect example here. This scenario, which was briefly discussed earlier, is now being revisited in the context of a fully articulated ISLM-ADAS model.
- 10.
This is reminiscent of the very low short-term interest rates experienced by Japan in the early 2000s and in the United Sates from 2008–15—virtually zero percent interest rates!
- 11.
In a following chapter, the Identification Problem will help explain why it is econometrically very difficult even today to identify the “real” model when dealing with time-series data.
- 12.
The Federal Deposit Insurance Corporation (FDIC) was a result of the Great Depression. Established in 1933, the FDIC insures bank deposits for up to $100,000 per deposit. This (it was hoped) would ensure that depositors no longer fear bank failures and thus recessions and depressions would not precipitate panics and provoke runs on banks.
From The Macmillan Book of Business and Economic Quotations, Michael Jackman, 1984.
- 13.
The monetary aggregates, M1-3 will be defined in Chap. 11. For now, M1 includes all cash and demand deposits, and M2 includes all of M1 plus interest bearing checking accounts.
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Langdana, F.K. (2016). The Keynesian Model. In: Macroeconomic Policy. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-32854-6_9
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