Incremental Inflation

If you want a good plain English explanation of what the new Gauti Eggertsson and Paul Krugman paper on "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach" (PDF) says, you should of course turn to Paul Krugman here or here.

But I did want to call attention to one side-issue. Back on November first, Krugman blogged:

It's also crucial to understand that a half-hearted version of this policy won't work. If you say, well, 5 percent sounds like a lot, maybe let's just shoot for 2.5, you wouldn't reduce real rates enough to get to full employment even if people believed you — and because you wouldn't hit full employment, you wouldn't manage to deliver the inflation, so people won't believe you.

I said that didn't make sense to me and that a modest increase in inflation expectations should deliver a modest result, not no result. And in the new Krugman/Eggertsson model this comes out my way:

Where this model adds something to previous analysis on monetary policy is what it has to say about an incomplete expansion – that is, one that reduces the real interest rate, but not enough to restore full employment. The lesson of this model is that even such an incomplete response will do more good than a model without debt suggests, because even a limited expansion leads to a higher price level than would happen otherwise, and therefore to a lower real debt burden.

Victory. The real story of the model is that an increase in government purchases would have the most effect. And I'm all for 'em. But it's also worth thinking about what kinds of endeavors it's feasible to undertake at very large scale. Transfer payments—i.e., the government mails checks to people—aren't as well-targeted, but the logistics of adding a zero to the check are very easy. And such transfers could be "money-financed"—i.e., paid for by increasing the money supply rather than by increasing government borrowing—and thereby work on both sides of the issue. This is the fabled helicopter drop of yore and with Helicopter Ben himself running the Fed I'm continually surprised we're not seeing more discussion in the policy community of what it would take to get the choppers off the ground.