Perhaps the key point differentiating the PSST view from a more traditional AD-AS view is assumptions about the speed at which new market connection are made and factors relating to the co-variance in that speed.

If connects were instantaneous then we could just retreat to Walrasian Equilibrium and be done.

If connects are not instantaneous then first we have curious question about co-variance. Why are so many connects broken or made at the same time. Further, why is it that sometimes it seems rapid change is making connections faster than breaking it and other times its going the other way.

A simple appeal to well, sometime things are like this, sometime they are like that, will not do. The network is massive. Connections happens every day. When we look at employment data we are looking at the mean number of connections over some period of time. The central limit theorem should apply.

That is overwhelmingly things should just move along as if we were in a smoothly rotating economy. Not because we are, but simply because the number of changes is so massive and so spread out randomly.

We have to appeal to major systemic shocks in one form or another to get around this. Or, perhaps some sort of collective reallocation of attention, though I am not sure how far you can go with that.

Yet, this brings up the role of policy and liquidity. Suppose that credit “greases the wheels” of connection generation. Its not hard to imagine how. Capital is easier to finance, start-up costs easier to obtain, bumps in the road easier to smooth out.

Now are we moving to a synthesis where increased connection generation is the transmission mechanism for monetary policy?

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