Another Multplier Study, zero bound, multipliers

Mankiw links to this paper by Marty Eichenbaum, Larry Christiano, and Sergio Rebelo.

I will read the introduction in blog time. They talk about a mild shock to the discount factor and a larger shock to the discount factor. Let's talk about the difference between the two in Qm Teory. The mild shock reduces the integrated sum of the yield curve and stresses the current equilibrium points, but does not change them. The larger shock forced a dimansion reduction in the equilibrium set, a QM style deflation.

The larger shock requires time for the bankruptcy events as the economy re-constitutes itself to a smaller dimensionality or N-1. What happens to a fiscal stimulus under the two conditions, the stimulus. In the case of the large shock, the stimulus has an effect of paying off the bankruptcies, easing the deflation path.

In the case of the small shock, the effects are dependent on the ancillary constraints, and whether government plays a positive or negative role in the constraints. The stimulus may be negative, forcing stress onto a situation in which could have remained of the same dimensionality. If the ancillary constraint was something controlled by the government then in the second case the stimilus may be positive, depending on how it alleviates some offending constraint.

The authors talk about hitting the zero constraint on the yield curve. This is a condition that happens in central banking systems where the monetary market adapts slower than the offending shock. The condition should also happen at different times for competitive monetary systems. And due to the delay of transport problem with gold, zero bound will be ontained more often. When the monetary system is stuck at zero by an incomplete financial market, then the yield curve will demonetize pats of the economy until its natural shape is reached by deflation, or until the financial market clears a positive short term rate.

There claim is that large multiplier exist at zero bound situations. Well, yes, under conditions of forced deflation, then the role of the government sector, ralative to the private sector will increase. So, we are in the situation of government taken a much larger role of insurance i a much smaller economy, a bad result but a high multiplier. The result is bad because it takes us backwards in time, enforcing a technical regress.

The proper course, recommended by QM Theory

The goal today is for fiscal policy to remove its role in any sever economic constraint. One constraint the goverment imposes is size, when it occupies more of than its equilibrium share of the yield curve then we get measurement uncertainty, crowding out. If the economy expects to grow (inflate) but that the constraint of over large government prevents this, then the government needs to shrink.