Why Does Stimulus Work? A Follow-Up

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Just a quick note: a few days ago I linked to a John Cochrane post in which he suggested a big difference between the Old Keynesian and New Keynesian explanations for why fiscal stimulus works. Aside from any other disagreements that liberal economists might have with Cochrane, I was curious about whether his description was correct. Well, for those of you who have been sitting on the edges of your seats waiting for an answer, now we have one. Robert Waldmann (here) and Paul Krugman (here) basically say that Cochrane’s story is so fundamentally confused that it’s all but impossible to even criticize it. “Cochrane’s fantasy has so little connection with reality that it is hard to discuss,” says Waldmann. “He can’t be bothered to actually figure out how the models work,” says Krugman. So that’s that. No punches are being pulled in this cage match. Just thought I’d pass it along.


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