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Still, I think if you'd asked a Keynesian in 1993 or 1994 what would happen
if the U.S. went from a structural budget deficit of 3.4% of GDP in 1993 to
0.2% in 1997 with real short-term interest rates around 4%, s/he would have
painted a picture of stagnation, not steady, respectable growth.
>> You know, "Keynesianism" is becoming like the bible - you can find something for everyone. Look at Japan. Monetarism rules while they fall deeper into a liquidity trap. Sam Nakagama has suggested some inflationary jolt to drive real interest rates to less than zero! Others have suggested a BOJ rate hike to get interest income up for savers!!!
Has anyone noticed that it is becoming harder and harder to teach macroeconomic theory?
I don't think anyone has a good "model" to explain either the US deficit or Japan. All these "rule of thumb" models are fast becoming obsolete - I'm not sure where we're going, but I think we're too close to the present to get a sense of what is really going on. Anyone believe in the yield curve would notice that.
jason