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Brad DeLong's Grasping Reality 2020-03-29 02:02:47

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Nick Rowe: Relative Supply Shocks, Unobtainium, Walras' Law, and the Coronavirus https://worthwhile.typepad.com/worthwhile_canadian_initi/2020/03/relative-supply-shocks-unobtainium-walras-law-and-the-coronavirus.html: 'A temporary 100% output cut in 50% of the sectors (what the Coronavirus does) is very different from a 50% output cut in 100% of the sectors (what our intuitions might expect from supply shocks in aggregate macro models).... Here's the intuition.... Unobtainium is a very desirable good.... Someone actually invents a way to produce unobtainium. They can't produce it just yet, but everyone knows they will produce it, and sell it at an affordable price, a few months from now. What happens when they hear the news? Everybody... wants to save up to half their income, so they

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Nick Rowe: Relative Supply Shocks, Unobtainium, Walras' Law, and the Coronavirus https://worthwhile.typepad.com/worthwhile_canadian_initi/2020/03/relative-supply-shocks-unobtainium-walras-law-and-the-coronavirus.html: 'A temporary 100% output cut in 50% of the sectors (what the Coronavirus does) is very different from a 50% output cut in 100% of the sectors (what our intuitions might expect from supply shocks in aggregate macro models).... Here's the intuition.... Unobtainium is a very desirable good.... Someone actually invents a way to produce unobtainium. They can't produce it just yet, but everyone knows they will produce it, and sell it at an affordable price, a few months from now. What happens when they hear the news? Everybody... wants to save up to half their income, so they can spend it on unobtainium in a couple of months time.... That is pretty much what's happening with the Coronavirus, in the real world. Half the goods we used to buy are temporarily unobtainium. But we expect to buy them in a couple of months.... High intertemporal substitution can beat low cross-section substitution.... That's why we need temporarily looser monetary and fiscal policy. (Plus, we also need fiscal policy to redistribute between people differentially affected by the Coronavirus, but that's another story.) Think that's (basically) right...

Bradford DeLong
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

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