My email to Brad DeLong

I agree with your point
that fiscal policy can work through V and that is the correct way to
think about it.  In fact Alex and I present this in our forthcoming
Principles text.

I think, however, you put too much emphasis on
interest elasticity.  Which is the relevant "M" in the equation of
exchange?  Surely not currency.  Yet I can earn an interest return on
most parts of M2, if I care to.

The key arguments for sometimes
using fiscal rather than monetary policy have, I think, to do with
targeting very particular parts of the real economy.

Plus maybe the Fed doesn't have a strong enough political constituency to be asked to handle the entire macroeconomic problem.

To
me those two factors are much more important than anything having to do
with interest elasticity.  Plus I am still influenced by Cooley's old
AER paper (1981?) and I don't trust any of the interest-elasticity
estimates, no matter what they find.

Tyler

Addendum: This paper prompted the email.

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