Some cool macroeconomics

Naryana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, kicked up a dust storm when he suggested that by raising interest rates the Fed may be able to increase inflation and pull the economy out of a deflationary spiral (that is, if we are in fact in such a spiral).

Paul Krugman and Nick Rowe jumped all over this, arguing that Kocherlakota was making mistakes in logic that we would not tolerate if they were made by undergraduate economics students. Steve Williamson came to Kocherlakota's defense with the aid of a simple macro model. The debate thus far is between the neoclassical economists (Kocherlakota and Williamson) who appeal to high-tech new-fangled macro theory, and Keynesians (Krugman, Rowe (maybe?)) who argue that the neoclassicals have been so obsessed with the beauty of their models that they have forgotten some simple macroeconomic lessons that we used to teach undergraduates and graduate students back in the 1970s.

Now comes along George Evans, the high-techest of the high-techies when it comes to New Keynesian models with adaptive learning. Mark Thoma gets him on film walking through some state-of-the-art macro models in a remarkably lucid fashion to prove that Kocherlakota is absolutely, 100 percent wrong. High tech, low tech, it doesn't matter - you don't raise interest rates when your economy is in recession on the verge of deflation. Watch the movie!