What happened to the QE skeptics?

I don’t hear much anymore from people denying that printing money boosts NGDP. Perhaps this story from yesterday morning explains why:

The comments from Benoit Coeure, initially made in private on Monday at a conference attended by one of Britain’s richest hedge fund managers Alan Howard, some of his peers and academics, sent markets into a flurry when they were published on Tuesday.

Anticipating a flood of yet more euros onto the market, the single currency tumbled when the ECB released its Executive Board member’s remarks, sending European shares rising to near multi-year highs.

Coeure said the speed of the recent spike in bond yields, was worrisome and that the ECB could “moderately” increase its buying in May and June so that it did not fall below its monthly buying target. He said, however, that the two were not linked.

Other central bankers chimed in with support for the ECB’s fledgling scheme to buy 60 billion euros a month of chiefly government bonds, a programme known as quantitative easing.

“The Eurosystem is ready to go further if necessary …,” Christian Noyer, who as governor of the Bank of France also sits on the ECB’s decision-making Governing Council, said in Paris.

The excitable market reaction, pulling the euro down below $1.12 and paring back the returns or yields on government bonds, illustrates how critical money printing is to confidence.  (emphasis added)

Two comments:

1.  Yes, the markets are right that money printing is critical.

2.  Must be nice to be the sort of rich hedge fund manager that gets this “critical” information before the rest of us.

Then there are those who are agnostic on the real economy, but insist that QE is blowing up bubbles:

Academics will no doubt be discussing the effectiveness of QE in lifting the real economy for a couple of generations at least, and probably not reaching any definitive conclusions. Perhaps it pulls countries out of a recession, or perhaps they would have eventually started to grow again anyway? One thing we can say for sure, however, is that it boosts asset prices.

In fact, it is already happening. A series of Mario Draghi bubbles are already inflating across the eurozone. Where exactly? Well, Spanish construction is booming, Dublin house prices are soaring, German wages are accelerating, Malta is riding a wave of hot money, and Portuguese equities are among the best performers in the world. For a lucky few investors, QE is already working its magic.

In the 21st century, pundits will be unable to see anything other than recessions and “bubbles.”  There will no longer be periods of stable growth without “bubbles,” like the 1960s.  Of course bubbles don’t actually exist, but low interest rates as far as the eye can see means that asset prices will look bubble-like unless artificially depressed by a tight monetary policy that drives the economy into recession.

By the way, the rest of the article has data that supposedly supports the claims in the quote above, but they aren’t even close to being adequate.  Spanish construction is booming”?  How would we know?  They support that claim by pointing to a recent 12% rise in construction.  They don’t tell you whether that’s from a highly depressed level. Didn’t Spanish construction fall something like 60% or 80% during the Great Eurozone Depression? German wages accelerating?  We are told one German union got a 3.4% wage increase. That’s it. Malta’s property prices are up 10%.  Portuguese stocks are up 25%.  Snippets of information that provide essentially no support for the bubble claims being made.  But when you are sure that QE is blowing up “bubbles”, I guess that’s all you need.  After all, there could not possibly be any rational explanation for Malta’s property prices rising 10%, could there?


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84 Responses to “What happened to the QE skeptics?”

  1. Gravatar of Philo Philo
    20. May 2015 at 06:34

    Surely the wave of hot money that Maltese real estate is riding will soon break; and surely the author of this article has found a way to go short Maltese real estate, and as a result will soon be fabulously rich!

  2. Gravatar of benjamin cole benjamin cole
    20. May 2015 at 07:03

    The left wing has always been reticent about prosperity, a little bit snotty about boom times.

    Now the right-wing snivels about bubbles and inflation at the slightest whiff of economic growth.

    What gives?

  3. Gravatar of Peter K. Peter K.
    20. May 2015 at 07:54

    Wages are stagnant. The “prosperity” is mostly going to the top earners.

    The rightwing snivels about bubbles and inflation because they don’t like an activist government central bank printing money and devaluing their savings and debt-contracts.

    Bubbles are asset prices that are not sustainable and based on investing animal spirits and fads. See the Housing Bubble. I’ll agree it was deflating slowly – as people realized it was unsustainable – until the financial crisis and overly tight money by the Fed cause the credit markets to freeze and none of the banks trusted other banks.

    But financial and asset markets shouldn’t be SO fragile and SO dependent on Fed monetary policy. That was caused by years of deregulation and bought-off regulators.

  4. Gravatar of Doug M Doug M
    20. May 2015 at 08:12

    Isn’t it kinda the point to inflate a few bubbles.

    There are some prices that are sticky, and some that are not sticky. When market prices fail to find the market clearing level we will get unemployment. If we pump in some money, we will inflate the value of some assets. We will also deflate the real wage. Deflating the real wage will bring it back to its market clearing level, and reduce unemployment.

    But don’t tell anyone that you are attempting inflate a bubble because we have bubble paranoia. And don’t tell anyone that you intend to reduce the real wage because that is bad politics.

  5. Gravatar of Kevin Erdmann Kevin Erdmann
    20. May 2015 at 09:27

    Last year, FICO polled mortgage bankers and 56% of them said they were concerned that we are in an unsustainable real estate bubble. Total mortgages outstanding had declined every quarter since 1Q 2008. Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs, noted that this was understandable, since total homeowner equity was almost as high as it had been seven years ago, in 2007.

    http://www.fico.com/en/newsroom/housing-bubble-inflating-mortgage-lenders-tell-fico

    Apparently, we will remain in a bubble until the nominal decline becomes sharper.

  6. Gravatar of TallDave TallDave
    20. May 2015 at 11:20

    Oh thank God, sanity is prevailing.

    I was initially skeptical the futures market would mean much, but now I wonder if anyone at the Fed has noticed. I might even be a little surprised if the Fed let the predicted NGDP growth rate drop below 3%. I mean, some of the Fed governors have to have figured things out by now, right?

    On the real estate front there was an interesting piece that claimed China was allowing more money to flow out of the country recently, and much of it was going into US real estate. Hard to quantify those claims, obviously, but it’s interesting that China is also taking seriously the “naked official” problem where government officials have moved their whole families out of the country.

    http://en.wikipedia.org/wiki/Naked_official

  7. Gravatar of Steve Phillips Steve Phillips
    20. May 2015 at 11:40

    QE is of course, where a central bank buys government bonds in large quantities to add liquidity to a moribund economy. This has several effects. 1) What is demanded (bonds) relatively appreciates to what is offered (currency). Therefore, the price of bonds rise, while yields and the currency decline in value. And the currency decline is made worse by the fact that there are more currency units available from money creation relative to the improvement in the underlying economy (dP=dMV/T). Then, this inflation increases the inflation premium of the bonds raising their prices even more, etc. Fine tuning here? No, more like a meat axe. 2) The lower the interest rates, the higher the present value of assets. So, assets increase in value in the context of a moribund, or near-moribund economy. 3) K. Wicksell wrote many years ago that when interest rates were artificially lowered beneath their market clearing rate, there was great danger of the misallocation of resources. And John Mills (not J. S. Mill!) wrote that such misallocation caused the destruction of wealth by it being channeled into nonproductive ventures. Call it whatever one likes, the central banks practicing QE are artificially raising asset prices, artificially lowering interest rates, generating misallocations of capital into, perhaps, questionable ventures, debasing savings from which further investment stems, rewarding debtors at the expense of savers, and starving the private sector for funds, making everything worse than intended. (That starving is because lenders want to lend at rates as high as possible, to make profits and also cover inevitable bad debts, while borrowers want to borrow at rates as low as possible to keep their costs in line. Keeping rates too low makes bankers reluctant to lend except to the best risks, freezing “good” would be borrowers out of the market. Bankers then tend to buy safe government paper, and the economy continues to suffer. Actually raising rates to the natural clearing rate would be an effective stimulus to jump-starting the economy.) For the above reasons, I believe that QE has been, and will be a failure.

  8. Gravatar of collin collin
    20. May 2015 at 11:40

    And the German Bund jumped to ~.7% and oil is headed for $70/barrel!

    Why can’t we have the 1960s growth? I still say the 1960s boom was the Baby Boom growing the economy versus the current Baby Bust slowing down today. It still seems like it will hard for have out of control inflation when all the richest nations have less people spending money.

  9. Gravatar of David de los Ángeles Buendía David de los Ángeles Buendía
    20. May 2015 at 12:10

    Dr. Sumner,

    As Doug M. rightly notes above, the entire point of a “Monetary Stimulus”, which is part of the Quantitative Easing Policy (QEP), is to inflate the price of assets (e.g. stocks) and then have the owners of those assets realize a profit. That profit is supposed to be spent, increasing aggregate demand (AD). This is a “bubble”.

    Dr. Ben Bernanke explained as much in a New York Times editorial:

    “This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”[1]

    The Bank of Japan had pioneered this work and the Federal Reserve Bank had been studying it long before the Great Crash of 2008 [2]. Here is an example of the “Wealth Effect” in practice.

    “Bolstered by stock-market gains, affluent Americans bought more than 1.1 million vacation homes last year, up 57% from 2013 and the most since annual sales of the properties were first surveyed by the National Assn. of Realtors in 2003.”[3]

    It would seem that QEP has achieved at least part of what it was created to do.

    [1] http://wapo.st/NDJl2C

    [2] http://1.usa.gov/1qhtdVo

    [3] http://www.latimes.com/business/la-fi-re-vacation-home-sales-20150402-story.html

  10. Gravatar of Anthony McNease Anthony McNease
    20. May 2015 at 12:22

    Steve Phillips,

    “Call it whatever one likes, the central banks practicing QE are artificially raising asset prices, artificially lowering interest rates, generating misallocations of capital into, perhaps, questionable ventures, debasing savings from which further investment stems, rewarding debtors at the expense of savers, and starving the private sector for funds, making everything worse than intended.”

    Devil’s Advocate here, it could be argued that in 2007 and 08 the Fed was too tight causing the dollar to be overvalued. You are, figuratively speaking, debating Bernanke and now Yellen on what the value of the dollar should have been and should be now. Asset prices are overvalued? Relative to what? Debasing savings? The banks are swimming in deposits that they can’t utilize, so what efficient market would have a higher price for something that is currently overstocked? Loan demand is very low, so what efficient market would call for the Fed to increase the cost of borrowing with weak loan demand? Increasing the rates on deposits currently oversupplied and raising the cost of loans with very weak demand sounds very artificial to me.

  11. Gravatar of ssumner ssumner
    20. May 2015 at 13:16

    Peter, Given that the regulators were encouraging subprime lending, what value would there have been to have even more regulation, and thus even more subprime lending?

    And if you assume wise regulators, then why not assume wise bankers? Aren’t both assumptions equally unrealistic?

    Doug, You asked:

    “Isn’t it kinda the point to inflate a few bubbles.”

    No.

    Steve, You said:

    “Therefore, the price of bonds rise, while yields and the currency decline in value.”

    Why did QE cause bond yields to rise in the 1960s and 1970s?

    Collin, How do babies cause economic growth? Are there factories that employ babies?

    David, The Bernanke quote says nothing about the Fed trying to inflate bubbles, which would be a really silly idea, unlikely to work.

  12. Gravatar of benjamin cole benjamin cole
    20. May 2015 at 15:30

    BTW–Japan GDP up 2.4% YOY and the Nikkei 225 up by almost 50% YOY.

    Maybe QE does work, but it sures makes a good imitation. Real wages rising too.

    Let us hope the BoJ battens down the hatches and keeps the presses running. Inflation still very tame in Japan, though they are liquidating national debt.

    I don’t get it: What is there not to like about QE?

  13. Gravatar of Jim Glass Jim Glass
    20. May 2015 at 16:24

    Why can’t we have the 1960s growth?

    For one thing, it was from a low-base world-wide. WWII was plainly visible in the rear-view mirror and the Great Depression still in sight behind it. Some catch-up in the USA and far more around the rest of the world, for which the US economy was the prime engine of supply…

  14. Gravatar of CMA CMA
    20. May 2015 at 17:16

    There is tools to stimulate ngdp while stimulating less credit, portfolio rebalancing and financialization. We should use these.

  15. Gravatar of Steve Phillips Steve Phillips
    20. May 2015 at 18:35

    Anthony: “Asset prices are overvalued? Relative to what?” Relative to the operations of a ZIRP. If ZIRP is not artificial and conducive to making rational economic calculation virtually impossible, I’m not sure what is.

    ssumner: “Why did QE cause bond yields to rise in the 1960s and 1970s?” I’ll schedule nominal interest rates; inflation; stock market, bond, commodities, and real estate prices; productive and service wages for the periods over the next several days and see if I can provide an answer.

  16. Gravatar of BC BC
    20. May 2015 at 18:55

    Scott, skepticism about QE may be falling, but apparently liberals in LA are now against monetary and fiscal stimulus, at least for low wage workers. LA just decided that in 2022 they will offset monetary and fiscal stimulus for minimum-wage workers: [http://www.latimes.com/local/lanow/la-me-minimum-wage-questions-story.html].

    If conservatives made the Fed target 0% inflation, liberals would be up in arms. I’m not the expert on monetary policy that you are. What monetary school teaches that, while wage growth stuck at 0 combined with 0% inflation can cause unemployment, wage growth stuck at 2% combined with 2% inflation is fine?

  17. Gravatar of Britonomist Britonomist
    20. May 2015 at 19:39

    I’m skeptical of anything thing that lacks a good model. I’ve yet to see a good model that shows QE has any kind of linear relationship with the broader economy, I’ve seen models where it can have minor effects (e.g. boosting some asset prices, lower some bond yields), and one off effects (e.g. lowering default risks of governments) – but never a good model to suggest QE is a simple linear lever on NGDP.

  18. Gravatar of TallDave TallDave
    20. May 2015 at 20:36

    Why can’t we have the 1960s growth? For one thing, it was from a low-base world-wide. — But that was even more true in the 1920s, and yet we had TGD. Monetary policy matters.

    Steve Phillips — Actually raising rates to the natural clearing rate would be an effective stimulus to jump-starting the economy. — More like an electrocution. The feedback between worsening deflation expectations and rising interest rates would send investment off a cliff, draining all the liquidity from the economy.

  19. Gravatar of TallDave TallDave
    20. May 2015 at 20:48

    The “prosperity” is mostly going to the top earners.

    It’s true that productivity gains increasingly flow from fewer producers, but those gains still mainly flow to consumers, because free exchange dictates that consumers decide which value propositions maximize their utility.

  20. Gravatar of Major_Freedom Major_Freedom
    21. May 2015 at 03:12

    Of course bubbles do exist, and they are caused by central banks deliberately lowering interest rates, thus encouraging longer term more capital intensive projects at the expense of other projects, which thwarts capital structure sustainability.

    Bubbles are not encompassed by spending or price levels. They are caused by inflation and credit expansion no doubt, the very inflation and credit expansion that invariably results from Sumner’s “advocacy” of more reserves printed by the Fed, but bubbles are encompassed by real factors. That is what bubbles are made of.

    Of course Sumner can’t understand this due to his theory blinding him to it. He believes he has to look for double digit price inflation or NGDP increases. He claims that lowered rates is sometimes caused by inflation, but then every time in any historical analysis, it is right back to low rates means not enough money printing, period.

    Sumner does not understand that inflation does not affect all prices equally. This is precisely because of the very same reality that makes bubbles encompassed by real factors. The structure gets out of balance because of inflation necessarily affecting some prices and profits more than other prices and profits.

    Asset prices appear “bubble-like” whereas other prices do not appear “bubble-like” precisely because inflation’s disjointed affect on different prices. In order to understand how the sky high and continuing to climb at this pace asset prices are connected to bubbles, is to first ask how those asset prices being RELATIVELY so much higher is affecting investment, and capital structure sustainability.

    Sumner will blithly deny any problems here, since he falsely reasons from spending changes. He will ignore the real imbalances, and say that if and when the Fed inflates too much or too little, that’s when the underlying problems arise, and it won’t be until then.

    Flawed theory leads to flawed interpretations of events.

  21. Gravatar of Major_Freedom Major_Freedom
    21. May 2015 at 03:21

    Also, notice the contradictory views of mankind. When it comes to investors, MM theory tells us to guffaw and shed crocodile tears whenever anyone appears to be arguing investors never learn, or investors are repeatedly fooled, etc. I can’t count the number of times I have been told things like “MF you think investors are stupid, whereas I, captain defender of EMH, praise and worship investors as capable of adapting to anything thrown at them, including removing free market interest rates, prices and spending.”

    OK, fine, MMs think people can learn and adapt to anything.

    Then why do they always blame central bankers for recessions? All of a sudden, here people become “stupid”, who can’t learn, who repeatedly make mistakes.

    Of course this is all a priori views of people. It is not based on any empirical testing of certain people’s intelligence and foresight. “Investors” as distinguished from “Central bankers” are, a priori, people who either always learn and adapt, or throughout history have never learned and adapted as a permanent, universal group the way investors are viewed.

  22. Gravatar of ssumner ssumner
    21. May 2015 at 05:40

    CMA, A good start would be to remove the tax advantages of debt.

    Steve, Zero interest rates are set in the free market, why are they a distortion?

    BC, Yes, and I plan to eventually move to that crazy city. What’s happened to liberals since the 1980s, when most sensible liberals opposed the minimum wage?

    Britonomist, QE does not have a linear effect on NGDP, it depends on expected future growth in M.

  23. Gravatar of lysseas lysseas
    21. May 2015 at 05:44

    “2. Must be nice to be the sort of rich hedge fund manager that gets this “critical” information before the rest of us.”

    Spot on!

    http://blogs.wsj.com/economics/2015/05/20/ecb-to-stop-giving-journalists-advance-copies-of-speeches/

  24. Gravatar of Njnnja Njnnja
    21. May 2015 at 06:13

    How do you reconcile the lack of “bubbles” (if one defines a bubble as a great disparity between the fundamental value of an asset versus its market value), and the fact that monetary policy, especially QE, works through portfolio rebalancing effects (which requires people to make asset allocation decisions based on monetary policy stance, independent of consideration of the value of the underlying asset)?

    If people increase (nominal) demand for something, not because that something has increased in its fundamental desirability, but merely due to the hot potato effect, then why couldn’t the Fed cause bubbles by, say, increasing expectations using forward guidance to some extreme degree (e.g. saying that they expect to keep ff rates at 0-0.25 for 100 years)? Wouldn’t the increase in the stock market following such an announcement be a bubble, since any increase in future nominal cash flows (due to inflation) should be offset by decrease in the value of those cash flows on a real basis?

  25. Gravatar of Anthony McNease Anthony McNease
    21. May 2015 at 06:37

    Steve,

    “If ZIRP is not artificial and conducive to making rational economic calculation virtually impossible, I’m not sure what is.”

    Interest rates represent the supply and demand of deposits and loans. There is a huge supply of deposits, funds used for loans, and weak demand for loans. So how are low interest rates “artificial?” Asking the Fed to step in and artificially raise rates so you can earn more on your savings is asking for a government handout.

  26. Gravatar of Steve Steve
    21. May 2015 at 08:35

    “How do babies cause economic growth?”

    Babies break things, which need to be replaced. Babies are Keynesians!

  27. Gravatar of Edward Edward
    21. May 2015 at 09:01

    In all seriousness, if population growth falls below “replacement” levels, this will affect economic growth. The converse is also true. The baby-boomer generation is at least partially responsible for most of the growth is the post World War II era.

  28. Gravatar of Jim Glass Jim Glass
    21. May 2015 at 09:26

    In all seriousness, if population growth falls below “replacement” levels, this will affect economic growth.

    Growth in the gross sense of a large population having larger total economic production and consumption than a small population, yes.

    But as to a shift in the size of population having an effect on growth in the sense of economic development, increasing productivity per capita (or at least per worker), I’ve seen a whole lot of differing speculations about that but never any convincing conclusion.

    E.g., As Japan’s working age population shrinks one would expect its national GDP growth rate to slow. But should one expect this to cause it’s growth rate of worker productivity to also slow?

    Though actually a more interesting and more stark case example of this may be China, which has a working age population peaking right now and heading south from here, thanks to the one-child policy, IIRC.

  29. Gravatar of Edward Edward
    21. May 2015 at 10:10

    Jim,
    I may be wrong but hasn’t China recently relaxed the one-child policy?

  30. Gravatar of Britonomist Britonomist
    21. May 2015 at 11:16

    Scott: “Britonomist, QE does not have a linear effect on NGDP, it depends on expected future growth in M.”

    You know what I’m going to ask you aren’t you. :)

    What is your model!?!?!

  31. Gravatar of Jim Glass Jim Glass
    21. May 2015 at 11:19

    hasn’t China recently relaxed the one-child policy?

    Maybe so, but even if that produces a serious result it wouldn’t increase the working age population growth rate for 20 years.

    I just looked at the UN projections and they give the Chinese working age population for 2035 as being down 6.3% from today (from today’s 1,015 m to 951 m).

    For the record, the US working age population is projected to grow by 8.1% by then (from 198 m to 214 m).

  32. Gravatar of Don Geddis Don Geddis
    21. May 2015 at 11:23

    @Njnnja: “f people increase (nominal) demand for something, not because that something has increased in its fundamental desirability

    It’s “real” value may not have changed … but you measure value in nominal units. Monetary policy changes the value of those nominal units. So (nominal) demand for the thing rose, not because its real value changed, but because its nominal fundamental value increased (due to the nominal unit decreasing in value).

    You need to realize that nominal fundamental value can go up, even if real fundamental value remains unchanged. Just because the price rose, doesn’t mean it was based on something other than “fundamentals”.

  33. Gravatar of Don Geddis Don Geddis
    21. May 2015 at 11:30

    @MF: “Then why do they always blame central bankers for recessions? All of a sudden, here people become “stupid”, who can’t learn, who repeatedly make mistakes.

    As usual, you misunderstand recessions. It’s not because individuals are making “stupid” mistakes. There is nothing for them to “learn”. (This is why it isn’t inconsistent to say that they could learn, were there something available to learn.)

    Recessions are a Nash equilibrium. No individual has anything to gain by changing their behavior by themselves. Nonetheless, the society as a whole could be wealthier, if only the central bank correctly managed the money supply in order to push the economy to a higher point on the production-possibility frontier. The economy has multiple Nash equilibria, and the central bank chose a bad one.

  34. Gravatar of Njnnja Njnnja
    21. May 2015 at 12:53

    @Don Geddis

    Just because the price rose, doesn’t mean it was based on something other than “fundamentals”.

    That is exactly what I am struggling with. In one sense, monetary policy is of course a fundamental driver of the economy, and therefore a fundamental driver of the value of any asset. But the hot potato effect isn’t supposed to work through the level of individuals making decisions about fundamental values (e.g., because of higher inflation, the new iPhone will have a higher price and therefore AAPL will have a higher discounted cash flow and therefore is worth more), but rather, through trying to get back to a risk/return portfolio that looks more like what they had in the first place (e.g., the Fed buys short term Treasuries from someone who doesn’t want cash, so he buys long term Treasuries. The guy who sold the long term Treasuries buys corporate bonds, and they guy who sold the corporate bonds buys dividend paying utility stocks. The guy who sold dividend paying utility stocks buys AAPL, driving up the price of AAPL).

    If the first example of AAPL stock going up in value is a “fundamental” reason, then it seems to me that the second example is not a “fundamental” reason. And if the value of an asset goes up irregardless of its fundamental value, then I think that worrying about whether it is a “bubble” makes sense.

  35. Gravatar of Vaidas Urba Vaidas Urba
    21. May 2015 at 12:59

    This is an interesting quote from Coeure’s speech: “In standard DSGE simulations, the ZLB is captured by the policy rate being non-negative at each point in time along the future path of the economy. But taking into account the possibility for monetary policy to exert influence on longer-term interest rates would lead to a more benign assessment of the impact of the lower bound on, say, the size of fiscal multipliers, or on the welfare impact of structural reforms.”

  36. Gravatar of Don Geddis Don Geddis
    21. May 2015 at 15:17

    @Njnnja: Your confusion is reasonable. You’ve thought about the direct effects of QE, the Hot Potato Effect, and a portfolio rebalancing channel. But the main monetary transmission mechanism is via expectations (of the future path of monetary policy).

    A car dealership forecasts that they will sell 100 cars at $20K each. Then the Fed changes monetary policy, and the new expectation is greater nominal demand. The dealership now anticipates selling 110 cars at $22K each. With this new expected revenue and sales, they immediately hire an additional salesperson, and the stock value of the dealership correctly rises (for “fundamental” reasons about the new expected future cash flow). The Fed has switched the economy from one equilibrium, to a new higher one, with greater production. Based solely on “expectations”.

    But you seem concerned about the direct effects, the “concrete steps” to get from here to there. You may find Nick Rowe’s classic concrete steppes post enlightening.

  37. Gravatar of Postkey Postkey
    22. May 2015 at 03:08

    A ‘bubble’?

    “Aerial photograph of Imperial Palace of Japan in 1979 … grounds were valued by some as more than the value of all the real estate in the state of California.”

  38. Gravatar of ssumner ssumner
    22. May 2015 at 05:18

    Njnnja, I don’t see any relationship between bubbles and the hot potato effect. Monetary stimulus makes the fundamental value of assets rise, perhaps due to higher growth expectations.

    Edward, Sorry, but that makes no sense to me. Boomers were too young to work during the 1946-64 boom.

    Britonomist, If you mean mathematical model, as far as I know there are no good models of fiat money, no one has solved the indeterminacy problem. Even when interest rates are positive.

    If you define “model” more broadly, as you should, my blog is full of models. Try googling and you’ll find some.

    Vaidas, Interesting, but could you explain the “structural reforms” part of the comment?

  39. Gravatar of Njnnja Njnnja
    22. May 2015 at 06:42

    @Don Geddis

    To the extent that increases in asset values are due to a better expected economy then clearly there is no reason to worry about a bubble (at least, no more than any other time). But my understanding of the portfolio rebalancing story is the fact that it moves investors out of their preferred habitat in a “reach for yield.” Part of that is into productive, nonfinancial assets (which would actually be a concrete transmission mechanism, but not important to the bubble story), but part is into a different asset class than they were in before.

    Note that they aren’t increasing asset allocations into higher risk assets because they think that the returns on those higher risks have gone up; to the contrary, they typically think that the higher risk asset might have even lower returns than the lower risk asset that they would prefer to be in. It might be as simple as the loans they were in before have fewer covenants than the new ones, and a lower rate, but they invest anyways, or it could be as big as actually changing asset classes, e.g., a fixed income investor starting to invest in some structured asset class that they never had before in order to maintain yield. The resulting price increases are not fundamental.

    I’ll partially answer the question but I’m not satisfied with it which is why I am posing it here. My (partial) answer is an EMH cop out. Basically, the increase in prices for a higher risk asset class due to this portfolio rebalancing *is* consistent with the expected equilibrium state. But it would be an amazing coincidence if the amount of investors driving up the price of some asset class because they left their old asset class in a search for more yield balanced correctly at the price that would be obtained with a “wisdom of the crowds” approach of many analysts doing fundamental research. And of course, once I make an appeal to EMH then I am really begging the question and assuming away the existence of bubbles from the start.

    So it is this concern, that prices of some assets are going up because investors are being greedy and stupid as their old asset classes become less attractive, that leads many to believe that these riskier asset classes have a lot of downside risk should investors wise up.

  40. Gravatar of Vaidas Urba Vaidas Urba
    22. May 2015 at 07:07

    Scott: “but could you explain the “structural reforms” part of the comment?”

    Coeure is referring to this as a standard NK view in his footnotes: http://www.federalreserve.gov/PubS/ifdp/2013/1092/ifdp1092.pdf

  41. Gravatar of Postkey Postkey
    22. May 2015 at 07:10

    @Jim Glass
    20. May 2015 at 16:24
    “Why can’t we have the 1960s growth?”

    There is an explanation here:

    http://www.press3.co.uk/publications/to_full_employment/chapters/

    for the U.K. economy?

  42. Gravatar of Britonomist Britonomist
    22. May 2015 at 07:57

    @Scott

    “Britonomist, If you mean mathematical model, as far as I know there are no good models of fiat money, no one has solved the indeterminacy problem. Even when interest rates are positive.

    If you define “model” more broadly, as you should, my blog is full of models. Try googling and you’ll find some.”

    Scott, I prefer mathematical models (or at least models communicated in some kind of formal, logical unambiguous structure) because they at least force the model maker to clearly state his/her assumptions (even if unintentionally, when you specify the mathematical functions that govern consumption you’re clearly showing your assumptions about agents’ behavior), whereas verbal descriptions often are subject to misinterpretation and often descend into semantic bickering. Furthermore, models clearly show where the black boxes in someones thinking is.

    I still think Market Monetarists have a huge black box problem with monetary policy, it’s basically just assumed to be able to determine NGDP or the broader money supply under any circumstance, and when challenged on this they use every defense possible ad hoc to justify this (e.g. “other prominent economists agree”, “no central bank that has ever ‘really’ tried has failed to hit a nominal target”, “the stock market seems to think monetary policy is effective”, “banks don’t matter”). These may be fine arguments for policy advocates, but as economists we should be more interested in what’s really going on, untangling the blackbox.

    Regarding indeterminacy, I’m sure I recall you saying in the past that Bennett McCallum had in fact solved this problem.

  43. Gravatar of TallDave TallDave
    22. May 2015 at 20:39

    So they may revise Q1 up? Apparently seasonal variation is higher than currently accounted for.

    “The researchers argued that the final, aggregate data should also be adjusted.”

    Zuh? A seasonal adjustment for the year? Or some other adjustment?

    Caution is warranted, we don’t want things like this to happen.

  44. Gravatar of TallDave TallDave
    22. May 2015 at 20:44

    Oops here’s the article, and another cautionary tale.

  45. Gravatar of ssumner ssumner
    23. May 2015 at 13:30

    Thanks Vaidas, Obviously I strongly disagree with the view that positive supply shocks are contractionary because they raise real interest rates at the zero bound. I disagree because unlike the NKs I don’t think inflation matters.

    Britonomist, Yes, I did say that about McCallum, but unless I’m mistaken you can’t solve the problem within the basic NK interest rate approach. You need some outside assumption. Indeed NGDP futures targeting is one of the most promising ways of overcoming indeterminacy. And it does not involve any “black boxes.”

    If you read the NeoFisherian stuff you’ll get a fuller understanding of why the mathematical approach is not enough. Conventional economists get upset with their claims (and so do I) but what is the problem with NeoFisherism from a mathematical perspective? Can you tell me?

    You said:

    “I still think Market Monetarists have a huge black box problem with monetary policy, it’s basically just assumed to be able to determine NGDP or the broader money supply under any circumstance, and when challenged on this they use every defense possible ad hoc to justify this (e.g. “other prominent economists agree”, “no central bank that has ever ‘really’ tried has failed to hit a nominal target”, “the stock market seems to think monetary policy is effective”, “banks don’t matter”). These may be fine arguments for policy advocates, but as economists we should be more interested in what’s really going on, untangling the blackbox.”

    How can you complain about vagueness and then post something like this? Is your claim that there are situations where even infinite increases in the money supply are not inflationary? Seriously? Even if the central bank bought the entire world? If not, what is your specific worry? Are you worried that the central bank might run out of eligible assets to buy? Sure, that could happen, I’ve never denied it’s a possibility. I can’t tell what you are complaining about, it’s all so vague.

    Talldave, It’s hard to believe this sort of revision would occur in the near future.

  46. Gravatar of Britonomist Britonomist
    23. May 2015 at 14:01

    ” what is the problem with NeoFisherism from a mathematical perspective? Can you tell me?”

    I actually don’t have a huge problem with NeoFisherism over the very long term, I don’t understand why this means a mathematical approach is invalid. You can use a mathematical model where NeoFisherism doesn’t hold, if your model does not result in (or assume) long run monetary neutrality, then it doesn’t hold.

    “How can you complain about vagueness and then post something like this? Is your claim that there are situations where even infinite increases in the money supply are not inflationary? Seriously? Even if the central bank bought the entire world? If not, what is your specific worry? Are you worried that the central bank might run out of eligible assets to buy? Sure, that could happen, I’ve never denied it’s a possibility. I can’t tell what you are complaining about, it’s all so vague.”

    I don’t object to the idea that the central bank can do a policy which increases NGDP significantly and directly, I’m skeptical however that any of the conventional tools the CB has available right now, such as interest rate guidance or QE, are effective right now at the ZLB (not that they have NO effect, but they are mild compared to fiscal policy/helicopter drops). I want a model of what the central bank can do to easily fine tune NGDP, a model that shows the CB can so easily and effectively fine tune NGDP that it can instantly correct the path of NGDP after an enormous downwards pressure on NGDP brought about by an enormous financial crisis, like you seem to suggest.

  47. Gravatar of Britonomist Britonomist
    23. May 2015 at 14:37

    I should clarify – I’m also skeptical of anything such as ‘announcing an NGDP target’, or targeting an NGDP futures market, when the only instruments are available are interest rate guidance and QE – I’m open to the possibility that these regimes are sustainable under alternative monetary instruments, which I’m still yet to hear about in 5 years (because you apparently oppose helicopter drops).

  48. Gravatar of Postkey Postkey
    24. May 2015 at 01:53

    @Britonomist

    ” . . . NGDP brought about by an enormous financial crisis, like you seem to suggest.”

    According to Anotole Kaletsky, {chapter 10 of his book, Capitalism 4.0}, it was the incompetence of one man {H. Paulson}, that led to the G.R..
    A.K. believes that it could have been avoided.

  49. Gravatar of Postkey Postkey
    24. May 2015 at 01:56

    Sorry

    Anatole

  50. Gravatar of W. Peden W. Peden
    24. May 2015 at 02:06

    “I’m skeptical however that any of the conventional tools the CB has available right now, such as interest rate guidance or QE, are effective right now at the ZLB (not that they have NO effect, but they are mild compared to fiscal policy/helicopter drops).”

    Could you disambiguate this? Does it mean-

    (i) Open market operations are effective at the ZLB up to a certain point.

    – or-

    (ii) Open market operations are always effective at the ZLB, but you have to do a lot of them to have an effect?

    If it’s (ii), then the only limitation on monetary policy at the ZLB is the amount of assets a central bank can buy in a given timeframe. If it’s (i), then you need some reason as to why at that certain point (whatever it is) the economy starts behaving in such a different way in response to OMOs. Note that that’s not a strawman: at a certain point to the right of the LRAS curve, OMOs are neutral with respect to real output before they are harmful. Of course, that’s not what you mean, since we’re talking about a situation well to the left of the LRAS curve.

  51. Gravatar of Britonomist Britonomist
    24. May 2015 at 05:56

    W. Peden, I basically agree with a form of the liquidity trap (which is modeled, at least!). At a certain stage (ZLB), highly liquid low yielding bonds and money are very close substitutes, so even if you replace all of these in the economy with cash (which is an enormous amount), it will only have a proportionally mild effect on NGDP. I want a model to show otherwise.

  52. Gravatar of W. Peden W. Peden
    24. May 2015 at 06:22

    Britonomist,

    You SEEM to be picking (ii), in which case it’s just a claim about effect size per OMO, and simply a matter of how many OMOs the central bank has to undertake. That’s a different claim from saying that monetary policy is ineffective at the ZLB. Since there are no constraints on the quantity of OMOs that a central bank can carry out, you are consequently saying that there are no limits on a central bank’s ability to hit an NGDP target even at the ZLB. Scott Sumner is saying the same thing; you and he just disagree on effect sizes.

    I fear that this outbreak of agreement won’t last for long, but you do have to recognise that right now you’re denying the liquidity trap hypothesis insofar as it is understood as a limitation on what monetary policy can do.

  53. Gravatar of W. Peden W. Peden
    24. May 2015 at 06:26

    And in another thread there is further evidence to suggest you don’t disagree: you say that permanent increases in base money from buying government debt would be effective. You just CALL them “helicopter drops”. Just calling OMOs “helicopter drops” if they are perceived as permanent is a long way from a liquidity trap hypothesis.

  54. Gravatar of Britonomist Britonomist
    24. May 2015 at 07:22

    “and simply a matter of how many OMOs the central bank has to undertake. ”

    I believe the effect size to be highly inefficient at ZLB, you’d have to do trillions to have a small minor effect, while fiscal injections are far more effective.

    “Since there are no constraints on the quantity of OMOs that a central bank”

    There are, there are political and pragmatic constraints. The CB’s balance sheet can only expand so much until it becomes politically untenable (unless under extreme scenarios, a sovereign debt crisis for instance) to maintain. There’s also a finite amount of government bonds and low yielding MBS it can buy.

    If you instead bought risky, high yielding assets which aren’t a close substitute with money – then this could be more effective (again, as long as you promise the injections to be permanent), but to me that’s not really QE and is closer to helicopter drops.

  55. Gravatar of Britonomist Britonomist
    24. May 2015 at 07:30

    “And in another thread there is further evidence to suggest you don’t disagree: you say that permanent increases in base money from buying government debt would be effective. You just CALL them “helicopter drops”. Just calling OMOs “helicopter drops” if they are perceived as permanent is a long way from a liquidity trap hypothesis.”

    First of all let me clarify. I think there are two kinds of liquidity traps, there’s the oldschool kind where you have a model in which the central bank can only buy safe assets i.e. t-bills. In this model, a liquidity trap is where the interest rate on these assets goes to zero, so money and t-bills become a very close substitute, and therefore swapping t-bills with money has little effect it has little effect on the individuals net worth.

    The second kind is the more modern balance-sheet recession kind of liquidity trap. This is where, even if you just directly give people more money, it has very little effect because people just increase their savings or use the money to pay down debt.

    I’m willing to discard the second kind of liquidity trap for now, I’m not completely convinced by it.

    Secondly, when I spoke of monetizing debt, I was thinking of buying government debt directly from the government, or undertaking measures specifically to ensure that the government is at zero increased risk of default from increasing the deficit by x amount by intervening in the bond market. To me this is basically equivalent to giving the government a blank check – under this scenario I’m thinking of this in terms of direct money injections (from government spending being large than otherwise) rather than the byproduct effect of swapping t-bills for money. Therefore it doesn’t run into the problems of the traditional liquidity trap at least.

  56. Gravatar of Britonomist Britonomist
    24. May 2015 at 07:32

    Sorry, not a blank check, but a check of x amount (it would be unwise to give a blank check of course).

  57. Gravatar of W. Peden W. Peden
    24. May 2015 at 07:43

    “to me that’s not really QE and is closer to helicopter drops”

    Could you clarify this?

  58. Gravatar of Britonomist Britonomist
    24. May 2015 at 08:06

    “Could you clarify this?”

    Or I doubt it’s the kind of ‘QE’ that market monetarists would support, they are ultimately free market leaning economists so suppressing yield on arbitrary risky assets would be a classic market distortion to them. It’s also again probably not a politically feasible policy.

  59. Gravatar of W. Peden W. Peden
    24. May 2015 at 09:00

    So what are the constraints on monetary policy, in your view, other than alleged political constraints?

  60. Gravatar of ssumner ssumner
    24. May 2015 at 12:11

    Britonomist, You said:

    “that it can instantly correct the path of NGDP after an enormous downwards pressure on NGDP brought about by an enormous financial crisis, like you seem to suggest.”

    This is just silly, I’ve never suggested anything of the kind. I’d recommend you read my paper on NGDP futures targeting.

    Worst case the central bank buys up the entire world, and we get the small effect you anticipate. But in that case we own the entire world, which is kind of neat, isn’t it?

    You said:

    “because you apparently oppose helicopter drops”

    The Japanese tried helicopter drops in the early 2000s and now have a giant national debt. How’d that work out?

  61. Gravatar of Britonomist Britonomist
    24. May 2015 at 17:56

    “This is just silly, I’ve never suggested anything of the kind.”

    You heavily implied it when you suggest the Fed could have easily prevented the recession.

    “The Japanese tried helicopter drops in the early 2000s and now have a giant national debt. How’d that work out?”

    Haven’t we been over this? I don’t consider quantitative easing with a strong commitment to remove the money at a later date helicopter drops.

  62. Gravatar of Don Geddis Don Geddis
    24. May 2015 at 20:14

    @Britonomist: “you suggest the Fed could have easily prevented the recession.

    Read your own words again. You wrote: The Fed “can instantly correct the path of NGDP after an enormous downwards pressure on NGDP brought about by an enormous financial crisis“. But nobody has made that claim, and it isn’t required to have prevented the recession.

    The Fed can alter NGDP … but perhaps over time, with a delay. Not “instantly”. And the “enormous financial crisis” was caused by the (tight money policy of) the Fed. It isn’t necessary to “fix” the downward NGDP pressure of the crisis, if you simply prevent the crisis from happening in the first place.

  63. Gravatar of W. Peden W. Peden
    24. May 2015 at 23:41

    Don Geddis,

    Well-put.

    At all times, the American government is doing something: monopolising base money within the United States. The question is not what is being done with regard to base money, but what ELSE besides this monopolisation is being done.

  64. Gravatar of W. Peden W. Peden
    24. May 2015 at 23:48

    That is, “monopolising the issuance of base money”.

  65. Gravatar of ssumner ssumner
    25. May 2015 at 05:30

    Britonomist, I’ve said repeatedly that there probably would have been a mild recession in 2008, even with NGDPLT. I even said this in my most recent post.

    You said:

    “Haven’t we been over this? I don’t consider quantitative easing with a strong commitment to remove the money at a later date helicopter drops.”

    I do not recall all of the arguments made by each of my 100s of commenters. But if you think the Fed can commit to permanent injections, then why do you believe in liquidity traps? That makes no sense.

  66. Gravatar of Britonomist Britonomist
    25. May 2015 at 07:41

    @Scott

    We’ll put aside the question of whether the Fed ’caused’ (rather than failed to prevent, which definitely does imply what I said) the recession since that’s all water under the bridge for now.

    “But if you think the Fed can commit to permanent injections, then why do you believe in liquidity traps? That makes no sense.”

    As I said to W. Peden:

    “First of all let me clarify. I think there are two kinds of liquidity traps, there’s the oldschool kind where you have a model in which the central bank can only buy safe assets i.e. t-bills. In this model, a liquidity trap is where the interest rate on these assets goes to zero, so money and t-bills become a very close substitute, and therefore swapping t-bills with money has little effect it has little effect on the individuals net worth.

    The second kind is the more modern balance-sheet recession kind of liquidity trap. This is where, even if you just directly give people more money, it has very little effect because people just increase their savings or use the money to pay down debt.

    I’m willing to discard the second kind of liquidity trap for now, I’m not completely convinced by it.”

    I believe direct permanent injections can overcome the first kind of liquidity trap I mentioned but not necessarily the second kind. However, I don’t find the second kind as plausible. Does that make sense?

  67. Gravatar of TallDave TallDave
    25. May 2015 at 09:02

    There are, there are political and pragmatic constraints. The CB’s balance sheet can only expand so much until it becomes politically untenable

    That’s nearly a circular argument though, like arguing that CBs are subject to ZLB constraints because pundits, politicians, and CBs believe CBs are subject to ZLB constraints.

    If people believe wrong things about CBs or CB balance sheets, it is not therefore reasonable to act as though those beliefs are correct. Besides, politics change all the time.

  68. Gravatar of TallDave TallDave
    25. May 2015 at 09:09

    Don Geddis — Yes, when people complain NGDPLT isn’t a panacea, I like to point out that not punching yourself in the face is also not a panacea, but does reduce facial bruising and is generally better than the alternative.

  69. Gravatar of Scott Sumner Scott Sumner
    26. May 2015 at 05:00

    Britonomist, So QE can overcome the only kind of liquidity trap that is plausible?

  70. Gravatar of Britonomist Britonomist
    26. May 2015 at 05:45

    Not QE, helicopter drops.

  71. Gravatar of Don Geddis Don Geddis
    26. May 2015 at 08:40

    @Britonomist: “Not QE, helicopter drops.

    But you’re not using those words, in the same way that everybody else is. You’re pretending there’s a disagreement here, but it’s (mostly) just your terminology.

    We can imagine three scenarios: (1) The Fed buys Treasuries [OMOs]; (2) The Fed buys “risky” assets [stocks? MBSes?] on the open market; (3) The Fed sends citizens new free cash, gratis. We all agree that any of these monetary injections need to be “permanent”.

    We all call #1 “QE”. We all call #3 “helicopter drops”.

    You apparently think there’s a huge difference between #1 and #2. Most of the rest of us would call both of those “QE”, not see much difference between them, and probably slightly prefer #1. (We think the monetary transmission mechanism comes from the HPE on the expansion of the monetary base, and it doesn’t much matter what specific thing the Fed buys.)

    You call both #2 and #3, “helicopter drops”. Your terminology is deliberately confusing. We see a huge difference between #2 and #3, and you apparently don’t. (Because you think the transmission mechanism is about what is purchased? And you don’t think the size of the monetary base matters?) But it would help if you stopped using the term “helicopter drops” for #2; you’re just adding needless confusion to the discussion.

  72. Gravatar of Britonomist Britonomist
    26. May 2015 at 11:45

    Don, the context of my tangent discussion with Scott here is specifically regarding Japan, where everyone seems to claim they engaged in new money financed deficits (but they didn’t really, it’s not new money if there’s a strong commitment to the idea that the money is only temporary and must be reclaimed, then its really just more debt) – still, the point is in this context helicopter drops is specifically referring to new money financed government spending, by the CB purchasing new government debt with permanent injections.

  73. Gravatar of Britonomist Britonomist
    26. May 2015 at 11:56

    Here’s a great sentence from Alphaville that echoes my sentiments exactly:

    “The most significant takeaway of all this is that the connection between monetary policy and the real economy, while significant, continues to change in ways that nobody, including the experts, can fully understand. Remember this whenever you hear that a given policy change is “obviously” right/wrong/necessary etc. There’s nothing obvious about any of this.”

    http://ftalphaville.ft.com/2015/05/26/2130056/central-banking-just-when-you-understand-it-it-changes/

  74. Gravatar of Scott Sumner Scott Sumner
    26. May 2015 at 13:40

    britonomist, The entire argument for helicopter drops is that CBs cannot commit to permanent monetary injections. Take away that assumption and the argument for helicopter drops collapses. You’d just do permanent QE.

    That FT gets off to a great start, pointing out that the interest rate approach to monetary policy simply doesn’t work.

  75. Gravatar of Britonomist Britonomist
    26. May 2015 at 14:27

    ” The entire argument for helicopter drops is that CBs cannot commit to permanent monetary injections.”

    That’s not my argument. My argument is that (at least traditional) QE doesn’t increase peoples nominal net-worth at ZLB, it just replaces someones (mainly pension funds, banks & other financial institutions which aren’t likely to care either way) holdings of a low yielding near money substitute with money. A helicopter drop (done properly) would boost peoples nominal (and possibly real in the short term) net worth, leading to a much more effective hot potato effect.

  76. Gravatar of Postkey Postkey
    27. May 2015 at 00:28

    “There are other significant ‘anomalies’ that have challenged the old as well as the new mainstream approaches. While theories place great store by the role of interest rates as the pivotal variable that has significant causal force, empirically they seem far less powerful in explaining business cycles or developments in the economy than theory would have it. In empirical work, interest rate variables often lack explanatory power, significance or the ‘right’ sign. When a correlation between interest rates and economic growth is found, it is not more likely to be negative than positive. 6 Interest rates have also not been able to explain major asset price movements (on Japanese land prices, see Asako, 1991; on Japanese stock prices, see French and Poterba, 1991; on the US real estate market see Dokko et al., 1990), nor capital flows (Ueda, 1990; Werner, 1994) – phenomena that in theory should be explicable largely through the price of money (interest rates). Furthermore, in terms of timing, interest rates appear as likely to follow economic activity as to lead it.”
    http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf

  77. Gravatar of ssumner ssumner
    29. May 2015 at 08:58

    Britonomist, You seem to endless go around in circles. Are you talking about temporary or permanent QE? If it’s permanent then of course it boosts net worth.

    And as you said, temporary doesn’t work even with a helicopter drop. So what is the point?

    Postkey, Nice quote (other than the part about interest rates being the price of money.) It nicely exposes the fallacy of reasoning from a price change.

  78. Gravatar of Britonomist Britonomist
    29. May 2015 at 14:52

    How does it boost net worth at the ZLB? As far as I understand it, it can boost net worth when it causes the price of the bonds you hold to go higher, and you therefore get more money than otherwise in return. But at the ZLB bond prices can’t go much higher, so agents receive x amount of cash, but lose x amount in bonds – their net worth remains unchanged.

  79. Gravatar of Postkey Postkey
    30. May 2015 at 01:32

    In the USA, in the great depression, the real value of net private balances rose by 46% between 1929 and 1932, but real national income fell by 40% {D. Patinkin A.E.R. Sept. 1948}.

  80. Gravatar of Postkey Postkey
    30. May 2015 at 10:07

    @Britonomist

    Diminishing marginal utility of ‘money’?

  81. Gravatar of Britonomist Britonomist
    30. May 2015 at 10:56

    @Postkey

    What about it?

  82. Gravatar of ssumner ssumner
    30. May 2015 at 18:00

    Britonomist, If the increase in M is viewed as permanent then the prices of stocks, commodities, real estate all rise. Expected future hot potato effect.

  83. Gravatar of Postkey Postkey
    31. May 2015 at 00:12

    @ssumner

    “Britonomist, If the increase in M is viewed as permanent then the prices of stocks, commodities, real estate all rise. Expected future hot potato effect.”

    Goods and services?

  84. Gravatar of ssumner ssumner
    31. May 2015 at 04:47

    Postkey, Yes, if future expected AD rises, then there is clearly more current demand for goods and services. That’s even true in NK models.

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