The Keynesian model continues to unravel
After everything that has happened since the beginning of 2013, it feels kind of pointless to continue beating the dead horse of Keynesian economics. But it’s also kind of hard to resist given the arrogance “confidence” of some of its most famous proponents.
Today two more things happened that the Keynesian model says are impossible:
1. The ECB cut rates from negative 0.1% to 0.2%.
2. The euro fell on the news.
So much for the zero bound, and the theory of monetary policy ineffectiveness.
Oh, and US stock futures rose on the news. So much for “beggar-thy-neighbor” theories, which have already been shot down 100 times.
Update: Vaidas Urba sent me an interesting observation from Gavyn Davies:
Unlike the example of Japan under Mr Kuroda, or QE3 in the US under Ben Bernanke, there is no suggestion that this is “open ended” action from the ECB, and no attempt to influence the foreign exchange market or inflation expectations by aggressive use of language. If the programme works, it will be because monetary conditions have genuinely been eased by the measures, not because of fanfares or smoke and mirrors.