Martinghoul/M22au
Interesting bbg article, looks like the quasi religious views of the macro establishment are taking some well deserved heat. There's one sentence I would take exception to:
"But in reality, economies that experience very low rates for many years -- first Japan, and now the U.S. -- seem to grow slowly and have low inflation, but not crash."
Mais voyons, at least not for now... n'est-ce-pas?
They only seem that way, at present but a crash is a very real possibility for Japan, given the size of the BOJ's balance sheet, the nation's indebtedness and the coming crash in JGBs.
The problem with Gabaix's theory is that while it seems to resolve a number of macro paradoxes, it fails to address the underlying fundamental flaw of the religious establishment: that the market's natural rate of interest is neither the impetus to save or invest, nor is set by the central bank, but instead is a function of people's valuation of present vs future consumption.
Contra Gabaix, the primary mechanism through which low interest rates eventually depress inflation is not the bounded rationality of economic actors (although that does play a role in the process), but rather the gradual decline in the originary interest rate caused by the central bank's constant depressing of the market rate of interest below the natural rate of interest. This intervention distorts consumer and producer evaluation of the value of future to present goods.
And so we can booms and busts and everything in between.
Intervention stinks. So do flawed paradigms, like those present in today's academia.
