Speed was key, and Prof. Parchure found talking on the phone (an actual, honest to god conversation over the phone, imagine!) the easiest.
It took me the better part of a day to figure out how to upload it on YouTube. Shows how old I am getting, no doubt.
Still, here you go. Talking with Parchure Sir is always enlightening, as is listening to him – as you are about to find out.
We’ll be doing a follow-up sometime soon, no doubt, so send in your questions, and I’ll try and include them in that conversation.
Dr. Parchure is the officiating director at the Gokhale Institute of Politics and Economics, where I work. He was also my guide during my PhD saga (there is no other word for it), and has forgotten more macroeconomics than I will ever learn.
Tomorrow, at some point of time, I and Dr. Parchure will be sitting down – at our respective homes, of course – for a chat about what India can do when it comes to macroeconomic policy after the worst of the corona virus lock-down is over.
First things first: health comes first, and that’s a non-negotiable. There’s no version of this story in which we can discuss trade-offs about “getting things back to normal” so that “the economy isn’t destroyed”.
As Russ Roberts puts it:
So we’ll be talking tomorrow about an as yet unspecified date in the future, where India might not be as mobile and social as she was before, but not as locked-down as she is right now. But when that day comes, what should macroeconomic policy look like?
Here are two articles that I will be basing this discussion on:
- Ira Dugal’s take on India’s monetary policy.
- Ananth Narayan’s take on India’s fiscal policy.
Please read both, and don’t worry if you don’t get some details. Just power through both write-ups regardless.
Here are some aspects that I will definitely be asking questions about tomorrow:
- The advisability of giving a monetary and fiscal stimulus: everybody seems to be taking it as a given (myself included). But is there a case to be made for limiting it, if at all?
- That out of the way, should both fiscal and monetary policy be wheeled out simultaneously? Either ways, why?
- What are the major tools in the monetary policy toolbox? Which of them will give the most bang for the buck? Which should we be holding back for later, and why? What mistakes should we be guarding against?
- Ditto for fiscal policy.
- What would Keynes have advised? I have this book in mind when I ask this question.
- What episodes, in 20th century macroeconomic history, have parallels we can learn from? If there are none, are current macroeconomic models good enough to handle such scenario? If not, how might they be updated?
- If you, Dr. Parchure, were in charge of things – interpret that as you being given carte blanche to handle India’s economy, no questions asked – what would you do? What are the political realities that in reality will stop some of these solutions from being implemented?
I’ll be sharing this blog post with Dr. Parchure, but in the meantime, if you have any questions that I have missed, please let me know in the comments, or email me.
The conversation will be up on YouTube tomorrow at some point of time.
Stay home, stay safe!
You might have been hearing/reading about MMT recently. Today’s set of links is really one place to read a lot of back and forth between two economists about what MMT means in practice – plus an additional bonus link, and a Twitter thread.
You absolutely should read each of these links if you are a student of macro. You probably should read these links if you are interested in the economy – but in this case, feel free to skip some of them. I leave it to your judgment.
- “OK, Lerner: His argument was that countries that (a) rely on fiat money they control and (b) don’t borrow in someone else’s currency don’t face any debt constraints, because they can always print money to service their debt. What they face, instead, is an inflation constraint: too much fiscal stimulus will cause an overheating economy. So their budget policies should be entirely focused on getting the level of aggregate demand right: the budget deficit should be big enough to produce full employment, but no so big as to produce inflationary overheating.”
Paul Krugman gets the ball rolling by explaining what Abba Lerner’s work was all about, why it made sense then, and perhaps doesn’t now.
- “Outside of the so-called liquidity trap, Krugman adopts the standard line that budget deficits crowd out private investment because deficits compete with private borrowing for a limited supply of savings.The MMT framework rejects this, since government deficits are shown to be a source (not a use!) of private savings. Some careful studies show that crowding-out can occur, but that it tends to happen in countries where the government is not a currency issuer with its own central bank.”
Stephanie Kelton responds by pointing out what she sees as the flaws in Krugman’s argument. I have had difficulty in understanding this part myself, which is why I have highlighted it.
- “So let’s be clear here: Are MMTers claiming, as Kelton seems to, that there is only one deficit level consistent with full employment, that there is no ability to substitute monetary for fiscal policy? Are they claiming that expansionary fiscal policy actually reduces interest rates? Yes or no answers, please, with explanations of how you got these answers and why the straightforward framework I laid out above is wrong. No more Calvinball.”
Of the questions that Krugman raises by way of response, it is the second one that strikes me as being at the heart of the issue. Expansionary fiscal policy reducing interest rates boggles the mind – well, my mind, at any rate.
- “#3: Does expansionary fiscal policy reduce interest rates? Answer: Yes. Pumping money into the economy increases bank reserves and reduces banks’ bids for federal funds. Any banker will tell you this.”
I have read Stephanie Kelton’s response, and re-read it, and I find myself confused even then. Expansionary fiscal policy, she says, does reduce the federal funds rate. I found this confusing…
- Until I read this twitter thread by Paul Krugman…
As it turns out, the route taken by the government to conduct expansionary fiscal policy matters. You learn a little more macro every time you read about it.