In a recent post I pointed out the uncanny correlation between the very small group of economists that either explicitly or implicitly criticized Fed policy as being too tight during the recent crisis, and the even smaller group that had published articles advocating a forward-looking policy of “targeting the forecast.”  It seems that having this forward-looking perspective made us especially likely to view monetary policy as too contractionary last fall.  When I came up with that list, I was thinking only of those who had made a contribution to the futures targeting literature, not minor figures who merely endorsed the ideas of what others.  I know only one economist who falls into the latter category:

Milton Friedman.

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Fasten your seatbelts; it could be a very interesting next few days.  I will get to all the comments from yesterday, but first there is breaking news that I found quite exciting (when you hear it you’ll probably be thinking:  “Exciting?  Get a life.”)

First a bit of background.  When I started the blog in February I focused on the sharp collapse in the economy after the failure of Lehman in mid-September.  I argued that the stock market crash of early October 2008 reflected a loss of confidence in the Fed’s willingness and/or ability to maintain adequate NGDP growth going forward.  But many readers found this “errors of omission” argument unconvincing.  Monetary policy looked accommodative, and it seemed implausible that it was the Fed’s fault for not immediately staunching the bleeding from the financial crisis.  Surely the causation went from financial crisis to falling AD.  Perhaps the Fed didn’t do enough to offset this shock, but (so the argument went) they can hardly have caused the problem.

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A few months ago an astute commenter mentioned a study (was it an IMF study by Rogoff?) that examined nearly 100 previous financial crises.  He said they found that real GDP fell sharply in every case.   He then used this evidence to refute my argument that easier money could have prevented a severe collapse in output during the late 2008 financial crisis.   My response was “yeah, but how many of those countries saw their currencies sharply appreciate during the midst of the financial crisis.”  I’d like to return to this issue, but first I will discuss recent market news.

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If I knew Mankiw was going to link to my last post, I wouldn’t have made it so meandering and confusing.  So here is the mop-up, what I really wanted to say.  But first a few clarifications, as I am getting a lot of comments that are challenging whether my question on movies was fair.   Here’s what I was trying to get across:

Question:   Suppose that people buy more of product X when the price is high, and less of product X when the price is low.  Does that violate the laws of supply and demand?

The answer is no.  It’s not maybe, or it depends, it is no, non, nein, nyet, bu shi, etc.  And it doesn’t depend on what the product is, what the two prices are, what the two quantities are, the answer is always no.

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Maybe you don’t find it confusing, but I do.  It all started a few years ago when we noticed that we had a “trick question” on our placement exam at Bentley.  The question asked what would happen to the demand for tea if there was a health scare regarding coffee.  Obviously coffee and tea are substitutes.  So if the health scare reduces the price of coffee then the demand for tea will . . . well, let’s think about it a bit more.

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