Wednesday, May 06, 2009

Lucas on the Crisis

In macroeconomics, there are two theories(or believes?) : no policy should be done, and as many policies as should be done for the ailing economy. The difference is due to how to see the functioning of a market: a market is self-regulating or not.

Which is true? Nobody can still answer it definitely. Robert Lucas, one of the theorists who are in the former position(at least I believe so), talked about the recent crisis:

The responsibility of the Federal Reserve in this situation is to provide more cash reserves, and in that sense they are doing their job.

...But right now the recession is the more immediate problem. If inflation resumes, reserves can be taken out as quickly as they were added. This is a classic lender-of-last-resort situation and it is important to maintain focus.

In my view, these are the most important considerations for US policy today. I think if the current Federal Reserve lending policies are continued aggressively our chances of avoiding a recession larger than that of 1982 are very good. At this point, I think this is the best that can be hoped for and it is a lot better than a replay of the 1930s.

He worries about the deflation and he thinks the Fed should add more money to people.

In my impression, textbook-version Lucas discussion is like that: nothing should be done, let it alone.

However, he doesn't think so. The lesson: we should ask the question for the right person!

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