Lecture 1: The sum of all fears
Paul Krugman
From Eichengreen and O’Rourke
From Eichengreen and O’Rourke
This wasn’t supposed to be possible:
“The central problem of depression-prevention
has been solved, for all practical purposes.”
Robert Lucas, 2003
And many people said things that look stupid
in retrospect …
“If you want a simple model for predicting the
unemployment rate in the United States over
the next few years, here it is: It will be what
Greenspan wants it to be, plus or minus a random
error reflecting the fact that he is not quite God. ”
Paul Krugman, 1997
This is not a supply shock …
Japan’s lost decade
9
15.4
8
15.3
7
6
15.2
5
Inflation
4
15.1
3
Real GDP per capita
2
15
1
0
Source: IMF WEO database
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
-2
14.9
1985
-1
Interest rate
14.8
Source: Census, Federal Reserve
Japanese money and prices
200
180
160
140
Monetary base
GDP deflator
120
100
Source: Bank of Japan, IMF
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
80
Money and prices in the Great Depression
300
250
200
Prices
150
Base
100
M2
50
0
1929
1931
1933
1935
1937
1939
Source: BEA, Historical Statistics of the United States, St. Louis Fed
Net federal borrowing (annual rate)
1200
1000
800
600
400
200
0
2007I
2007II
2007III
2007IV
2008I
2008II
2008III
2008IV
2009I
Source: Brad Setser
The Fed steps out
Source: Federal Reserve/James Hamilton