I was off at the cottage when Simon Wren-Lewis and Paul Krugman responded to my post on neo-fiscalism. Amusingly, given Simon's metaphor, the handbrake on the MX6 seized on as I was driving, slowing me down and creating a nasty smell. I did a fiscal bodge-job with a screwdriver to free it, and did a proper monetary repair with allen key and synthetic grease when I got back home.
We are arguing about the second- and third-best policies. We agree that actual monetary policy is not optimal. The question is whether or not a second-best fiscal policy response to the original monetary non-optimality would or would not lead to an even less optimal monetary policy counter-response. If one passenger has the screwdriver, and another has the allen key and synthetic grease, solve for the game's equilibrium. We need to know their preferences. (If the synthetic grease is back home in the garage, the equilibrium is simpler, and the fiscal screwdriver will get used.)
But something important is being left out of this debate. I have blogged about this in the past, and I want to raise it again now.