Farmer's Stimulus Package

Roger Farmer of UCLA is famous for a researcher on multiple equilibria and indeterminacy. This area of study is on how an economy reaches an equilibrium and it should be possibly multiple, just not only one. Which equilibrium path the economy takes depends on people's psychology.

Farmer says, go back to Keynes and boost up people's mind when they face recession:

Keynes... was right on one point: In the real world; psychology matters for the behavior of markets!

Farmer suggests a new type of monetary policy:

Central banks control interest rates by buying and selling securities on the open market....(Central banks) pick an indexed basket of securities: one candidate in the US might be the S&P 500, and to control its price by buying and selling blocks of shares on the open market.

Moreover, Farmer puts emphasis on a role of expectation:

Even the credible announcement that a policy of this kind was being considered should be enough to boost the markets and restore consumer and investor confidence in the real economy.

I am... arguing that the government should stabilize a broad basket of stocks.

Farmer finally keeps a distance from what is called free market fundamentalism:

This policy would still allow poorly run firms to fail but it would not allow all firms to fail at the same time. Although the free market is very good at deciding how many left and right shoes to produce, it cannot prevent systemic risk that arises from the psychology of herd behavior. This is a job for Uncle Sam.

I agree with him! However, looking back on the stimulus package that the Japanese government is seeking, I feel somewhat nervous about the effectiveness of it.