Here's a scenario: the Bank of Japan's 0% interest policy finally succeeds
in relflating Japan, the economy takes off, and Japanese capital returns
home. Then the European central bank finally gives in, lowers rates, and
European capital returns home. Suddenly, the U.S. has to confront the fact
that it's living $400 billion beyond its annual means; the U.S. becomes
Japan in 1989 and enters a decade of stagnation and international
>> 1) ALL finance texts assume a positive rate of interest to teach the concpet of present or future value. I tell my students when interest rates go to 0% there is no reason to take the course. Now of course this flies in the face of their text (e.g. Risk free rate = real rate + inflationary expectations), but the great thing about teaching finance these days is that almost EVERYTHING in the texts doesn't match reality. I wonder what Tokyo U is using in their MBA courses (anybody got a web site).
2) I think Doug makes a very compelling argument. All the commercial macro econometric models essentially rely on an a modified NC/Keynesian framework - and more importantly - their estimation periods do not have anything like the potential capital exits in their time series'.