As expected, Ben is with Lars

Here’s Ben Bernanke on the idea of using monetary policy to address financial imbalances:

Let there be no mistake: In light of our recent experience, threats to financial stability must be taken extremely seriously. However, as a means of addressing those threats, monetary policy is far from ideal. First, it is a blunt tool. Because monetary policy has a broad impact on the economy and financial markets, attempts to use it to “pop” an asset price bubble, for example, would likely have many unintended side effects. Second, monetary policy can only do so much. To the extent that it is diverted to the task of reducing risks to financial stability, monetary policy is not available to help the Fed attain its near-term objectives of full employment and price stability.

For these reasons, I have argued that it’s better to rely on targeted measures to promote financial stability, such as financial regulation and supervision, rather than on monetary policy.

One of the “unintended side effects” of the Fed’s 1928-29 attempt to pop the stock market bubble was the Great Contraction of 1929-33.  Another was Hitler taking power in Germany.  And another was WWII.  So if anything, Bernanke is being too polite to those who favor using monetary policy to prevent financial imbalances.

Now of course they’d insist that they also favored macroeconomic stabilization, and merely wish to use monetary policy at the margin.  But even those more reasonable proposals are highly questionable.  Bernanke cites one study (links further down) that does find that monetary policy might play a role, but not a very large one:

Although, in principle, the authors’ framework could justify giving a substantial role to monetary policy in fostering financial stability, they generally find that, when costs and benefits are fully taken into account, there is little case for doing so. In their baseline analysis, they find that incorporating financial stability concerns might justify the Fed holding the short-term interest rate 3 basis points higher than it otherwise would be, a tiny amount (a basis point is one-hundredth of a percentage point). They show that a larger response would not meet the cost-benefit test in their estimated model. The intuition is that, based on historical relationships, higher rates do not much reduce the already low probability of a financial crisis in the future, but they have considerable costs in terms of higher unemployment and dangerously low inflation in the near- to intermediate terms.

And even this is doubtful, as it depends on the very dubious assumption that low interest rates imply easier money:

A new paper by Andrea Ajello, Thomas Laubach, David López-Salido, and Taisuke Nakata, recently presented at a conference at the San Francisco Fed, is among the first to evaluate this policy tradeoff quantitatively. The paper makes use of a model of the economy similar to those regularly employed for policy analysis at the Fed. In this model, monetary policy not only influences near-term job creation and inflation, but it also affects the probability of a future, job-destroying financial crisis. (Specifically, in the model, low interest rates are assumed to stimulate rapid credit growth, which makes a crisis more likely.)

Indeed a tighter monetary policy during the famous housing bubble of 2005-06 would have probably been associated with lower interest rates, not higher.  Thus in a counterfactual where in 2001-03 the Fed had cut rates to 3%, not 1%, the level of interest rates in the 2005-06 bubble would have had to be lower than the actual path of rates, as the economy would have been in depression.

What most caught my attention is that Bernanke comes down strongly in support of his former colleague Lars Svensson, who quit the Riksbank in disgust over its tightening of monetary policy around 2010-11:

Lars Svensson, who discussed the paper at the conference, explained, based on his own experience, why cost-benefit analysis of monetary policy decisions is important. Lars (who was also my colleague for a time at Princeton) served as a deputy governor of the Swedish central bank, the Sveriges Riksbank. In that role, Lars dissented against the Riksbank’s decisions to raise its policy rate in 2010 and 2011, from 25 basis points ultimately to 2 percent, even though inflation was forecast to remain below the Riksbank’s target and unemployment was forecast to remain well above the bank’s estimate of its long-run sustainable rate. Supporters justified the interest-rate increases as a response to financial stability concerns, particularly increased household borrowing and rising house prices. Lars argued at the time that the likely benefits of such actions were far less than the costs. (More recently, using estimates of the effects of monetary policy on the economy published by the Riksbank itself, he showed that the expected benefits of the increases were less than 1 percent of the expected costs). But Lars found little support for his position at the Riksbank and ultimately resigned. In the event, however, the rate increases were followed by declines in inflation and growth in Sweden, as well as continued high unemployment, which forced the Riksbank to bring rates back down. Recently, deflationary pressures have led the Swedish central bank to cut its policy rate to minus 0.25 percent and to begin purchasing small amounts of securities (quantitative easing). Ironically, the policies of the Swedish central bank did not even achieve the goal of reducing real household debt burdens.

When someone leaves an important policy position, where a person is not really free to speak their mind, to blogging, which is all about speaking one’s mind, you quickly learn a great deal about their views on controversial issues. Anyone want to wager with me on what Bernanke and Svensson think of the ECB’s decision to twice raise rates in 2011?

I was only disappointed by one aspect of the post—Bernanke continues to (implicitly) use a conventional measure for the stance of monetary policy.

Despite the substantial improvement in the economy, the Fed’s easy-money policies have been controversial. Initially, detractors focused on the supposed inflation risks of such policies. As time has passed with no sign of inflation, that critique now looks rather threadbare. More recently, opposition to accommodative monetary policy has mostly coalesced around the argument that persistently low nominal interest rates create risks to financial stability, for example, by promoting bubbles in asset prices or stimulating excessive credit creation.  (emphasis added)

In 2003, Bernanke correctly pointed out that conventional measures such as interest rates are highly flawed:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman (in his eleventh proposition) and by Allan Meltzer, nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well. The real short-term interest rate, another candidate measure of policy stance, is also imperfect, because it mixes monetary and real influences, such as the rate of productivity growth. In addition, the value of specific policy indicators can be affected by the nature of the operating regime employed by the central bank, as shown for example in empirical work of mine with Ilian Mihov.

.  .  .

Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman’s advice to heart.

Of course by that criterion (averaging inflation and NGDP growth), money was tighter in 2008-2013 than in any 5 year period since Herbert Hoover was president.



36 Responses to “As expected, Ben is with Lars”

  1. Gravatar of benjamin cole benjamin cole
    7. April 2015 at 10:13

    Excellent blogging.
    Still, I would like to see Bernanke address both quantitative easing and interest on excess reserves. So far, one would conclude that a central bank has only interest rates in its quiver of policy arrows, based upon Bernanke’s blog.

    As a side note: a study that finds that a central bank, to increase financial stability, might raise interest rates by 3 basis points? Do some economists need a long vacation?

    Would a dietician tell a patient that he must restrict caloric intake by 6 calories a day for 17 days?

  2. Gravatar of Kevin Erdmann Kevin Erdmann
    7. April 2015 at 10:14

    You know what civilized people would do if they thought there were markets that were so obviously in a bubble that other people should risk losing their jobs in order to correct it? They should leverage up every asset they own, and put every penny on a short position. Then, they help make markets more efficient, and if they are wrong, nobody else need suffer from their error. If they don’t think that would be prudent, then it probably wouldn’t be prudent to put a few million other people out of their jobs and their homes either.

    The world is in crazy land these days, though, so practically everyone I talk to – people exposed to the job market, the stock market, and the real estate market – thinks the Fed should, even now, make them suffer more.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. April 2015 at 16:19

    ‘So far, one would conclude that a central bank has only interest rates in its quiver of policy arrows, based upon Bernanke’s blog.’


  4. Gravatar of dtoh dtoh
    7. April 2015 at 16:25

    I do think that an effective NGDPLT policy would exacerbate excessive risk taking by financial institutions unless you limited TBTF or put better asset/equity ratio controls in place.

  5. Gravatar of dtoh dtoh
    7. April 2015 at 16:29

    I’ll be curious when Bernanke reveals whether he was in complete agreement with Fed policy during his tenure or whether he merely agreeing in order to achieve consensus.

  6. Gravatar of marcus nunes marcus nunes
    7. April 2015 at 16:55

    At times he led the “parade”:

  7. Gravatar of benjamin cole benjamin cole
    7. April 2015 at 17:30

    Kevin Erdman—I just interviewed a round-robin of institutional real estate economists. None of them favorite deflationary central bank policies, and all of them favored moderate Iinflation as a policy. So there are industry groups that could be allies of Market Monetarism.

    Also we can hope if there is a GOP White House come 2016, we will see a collapse of tight-money hysteria. The right wing can say that with the GOP in charge there is enough reduction in structural impediments that a growth-oriented monetary policy is warranted.

  8. Gravatar of ssumner ssumner
    7. April 2015 at 18:18

    dtoh, To be honest I don’t think it would have much impact, but it might slightly increase risk taking. But it would also greatly reduce the risk of financial crisis, even with a bit more risk taking.

    Marcus, Good find, and of course under NGDP targeting he would have had a very different attitude in 2008

  9. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. April 2015 at 19:07

    “Bubbles”, “undervalued”, “overvalued”: they are all bad ways of framing the real question–how stable are a given set of asset prices? The dynamics of, for example, Australian housing prices, become much clearer if you get the framing right.

  10. Gravatar of Ray Lopez Ray Lopez
    7. April 2015 at 21:50

    Bernanke: ” monetary policy is far from ideal… monetary policy can only do so much” – and Ben advocates more regulation and cites a New Keynesian model (which models in dubious assumptions) to back his case. This is the High Priest of Monetarism speaking! If Ben has abandoned monetarism, maybe there’s hope Scott will see sanity? Nah…

  11. Gravatar of Ray Lopez Ray Lopez
    7. April 2015 at 21:55

    BTW, the Fed in the 1930s believed that LOW interest rates are a sign of LOOSE money (the opposite of Sumner) and were as ideologically biased as Sumner, so they raised interest rates to prevent this loose money from harming the economy. Carnival of ideologies, as a famous mural in Guadalajara says. Much ado about nothing (monetarism).

  12. Gravatar of dtoh dtoh
    8. April 2015 at 01:10

    I agree. I think the benefits of NGDPLT greatly outweight the cost, but I think it would greatly increase risk taking, which by the way is a problem that needs to be fixed regardless of whether the Fed implements better monetary policy or not.

  13. Gravatar of ssumner ssumner
    8. April 2015 at 05:02

    Lorenzo, Very good post.

    Ray, You said:

    “This is the High Priest of Monetarism speaking! If Ben has abandoned monetarism”

    Dear God! What are we going to do with you?

    dtoh, Relatively little risk for a given asset is attributable to business cycle risk. Even when NGDP growth is stable, asset prices are very unstable.

  14. Gravatar of TallDave TallDave
    8. April 2015 at 05:57

    Great point Kevin. The belief that central bankers can perceive and correct asset bubbles is really just the Fatal Conceit again.

  15. Gravatar of dtoh dtoh
    8. April 2015 at 06:20

    Scott, yes but there would be a much less systemic risk of a dramatic drop in overall asset prices because everyone expects the Fed would take action (buy assets) to prevent NGDP from missing the target.

  16. Gravatar of Kevin Erdmann Kevin Erdmann
    8. April 2015 at 06:33

    Dtoh, it doesn’t make any sense to create risk just so investors are more risk averse. It’s kind of perverse.
    And how can you think now, of all times, is a time that has too much risk taking?

  17. Gravatar of Tommy Dorsett Tommy Dorsett
    8. April 2015 at 09:55

    Given how far the ‘dotplot’ has been from the financial markets/reality, I cannot imagine 12 men and women trying to decide what the ‘correct’ S&P 500 p/e ratio is at any given time. Talk about a sh1tshow. Bernanke gets it and I think was being OVERLY polite to a club of clownshow critics.

  18. Gravatar of TravisV TravisV
    8. April 2015 at 11:00

    U.S. Stocks Advance as Fed Minutes Show Split Views on Rates

  19. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    8. April 2015 at 11:01

    @TallDave, @dtoh, @Kevin
    I know most people in this comment section favor NGDP targeting, level or rate, and in general agree that monetary policy has been tight since 2008. I know also that is difficult to perceive a bubble ex-ante, if it was not, they would never form, of course. But I work in the financial system, I personnaly worked in investment banking deals in 2000-2002, and banks were throwing money at telecom firms at the time, in one very representative case I helped a certain european cable firm raise 4 billion euros in 2000, the business case was based on a constant 7% growth in telecom services demand till … forever, three years later the company was bankrupt and defaulted on loans, capital was destroyed. Other telecom companies around the world went bankrupt. So, easy money may have real consequences, and giving bad signals for investors is one of them. Inflation does create discoordination at the micro level. That is also why I don’t favor NGDP LT, because if you do have a potential GDP drop, the level of inflation one must create in the subsequent years may be very harmful. NGDP rate targeting with a reasonably low target, let’s say less or equal to 4%, on the other hand, is more adequate in may view, because I buy the argument that aggregate nominal spending is a very good nominal anchor for expectations. MV = PY, if M is not stable, V is not stable, but MV is, let’s target it.

  20. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    8. April 2015 at 13:02

    Off topic, Prof. Sumner, have you seen this?
    What do you think of the money indexes created by Prof William Barnett ?

  21. Gravatar of Don Geddis Don Geddis
    8. April 2015 at 14:53

    @Ray Lopez: “This is the High Priest of Monetarism speaking! If Ben has abandoned monetarism, maybe there’s hope Scott will see sanity?

    Kindergarten-level tip: you might want to look up “monetarism” in a dictionary, before you try to (mis-)use in a sentence.

    Hint: neither Ben nor Scott are advocates of monetarism.

  22. Gravatar of Major.Freedom Major.Freedom
    8. April 2015 at 17:14

    “One of the “unintended side effects” of the Fed’s 1928-29 attempt to pop the stock market bubble was the Great Contraction of 1929-33. Another was Hitler taking power in Germany. And another was WWII.”

    Once again Sumner misleads his readers regarding WWII and the rise to power of the Nazis. Given the multiple corrections I have provided on this blog, in response to his multiple times repeating the above misleading interpretation, the only explanation can be that Sumner is purposefully misleading his readers to promote his agenda.

    Once again, the cause of the rise of Nazism in Germany is complex and was caused by many factors. It is possible for Nazism to have risen in Germany regardless of whether there was a monetary deflation (caused in part by a previous monetary inflation, which Sumner conveniently always leaves out) or not. We know this because National Socialism under the Nazi pattern did not rise the world over. It was localized. Why? Because of the complexity Sumner glosses over and tries to pin on a deflation (did I mention it was caused in part by a previous inflation?).

    The German philosophical movement during the 19th century was absolutely necessary, and for those of us who understand the influence of philosophy, it could very well have been both necessary AND sufficient for there to have been a rise of Nazism in Germany.

    It is however more likely that other factors were necessary. The Treaty of Versailles had a profound impact on the German psyche. The German people were made to pay for war reparations and this had an isolating effect on them. They were beaten down and told they were the cause of millions of deaths the world over. Coupled with the philosophical movement that idolized the “Ubermensch”, and castigated the Jews, and idolized the Nation as the incarnation of Reason through the Ubermensch, and the devastating economic fallout from the hyperinflation, which included the inevitable deflation, all those factors were the cause of Nazism.

    It is not deflation on its own.

    Sumner is spreading a myth, and a very irresponsible one at that. Maybe instead of trying to play holier than thou with the NYT, he should read his history.

  23. Gravatar of Edward Edward
    8. April 2015 at 17:28

    then why did Germany experience
    The rise of Hitler, RIGHT AFTER the deflation of 1929-1933? That’s a pretty strong correlation. You’re right (one of the few times) that the cause of WWII was multifaceted.
    But the Depression crystallized it. There has always been anti-semitism,( I should know, I’m jewish) grievances, and strange philosophical movements. People who are suffering economically will turn to demagogues. Without the catastrophic suffering caused by hard money policies demagogues will be voices shouting in the wind.

  24. Gravatar of Edward Edward
    8. April 2015 at 17:32

    Given that the hyper inflation was over by the late 1920s it seems pretty far fetched to blame Hitlers rumise on something that happened 10 years earlier.

    You mean to tell me it takes a decade to flush the “mal investments” caused by inflation out of the system?


  25. Gravatar of Major.Freedom Major.Freedom
    8. April 2015 at 17:42

    Sumner also continues to mischaracterize Ben Bernanke. As I showed in a previous MoneyIllusion blog post, in Bernanke’s blog post titled “Why Are Interest Rates So Low?”, which by Sumner’s stated (insincere?) belief is what Bernanke “really” believes because he is free to say what he wants and is not constrained by being involved with the Fed, Bernanke wrote:

    “The best strategy for the Fed I can think of is to set rates at a level consistent with the healthy operation of the economy over the medium term, that is, at the (today, low) equilibrium rate. There is absolutely nothing artificial about that!”

    This is Bernanke the blogger, who is free to say what he really thinks, apparently.

    But pay no attention to that! Focus on what he said in 2003 and present it very slyly with no explicit mention of that being what Bernanke really thinks today, because, well, that would be inconvenient.

    Interestingly, from that 2003 speech, Bernanke wrote:

    “These methods confirm that a monetary expansion (for example) leads with a lag of one to two quarters to an increase in nominal income. Perhaps more importantly, as Friedman emphasized, the responses of the quantity and price components of nominal income have distinctly different timing. In particular, as Friedman told us, a monetary expansion has its more immediate effects on real variables such as output, consumption, and investment, with the bulk of these effects occurring over two to three quarters.”

    So 2003 Bernanke believed in long and variable lags. The bulk of the effect of monetary expansion occurring two to three quarters later. I always knew there was a long lag. After all, it takes time for newly printed money to be spent and respect and increasing the bank balances of the “bulk” of the population, out of which “general” economic activity measures in numbers increases. This is so obvious that it must take a belief in extremely poor economic theory to miss.

    Perhaps 2003 Bernanke was under some kind of pressure to make the claims about the merits of Friedman’s ideas, as his blog posts seem to make clear?

  26. Gravatar of Major.Freedom Major.Freedom
    8. April 2015 at 17:58


    Holy Post Hoc Ergo Proper Hoc fallacy Batman!

    Humans are not robots.

    I just explained the multiple factors, and yet your single mindedness is even attributing single causes to me as well!

    Have you no shame?

    Hitler was named Chancellor of Germany in Jan 1933 by ONE PERSON in the Congresa, after his party and the philosophical movement behind it already gained power. Hitler was not some janitor sitting in his house all alone until deflation occurred and then all of a sudden a psychopath became dictator.

    Have you even researched why von Hindenburg named Hitler Chancellor when he did? It was to actually keep the Nazi Party in check! Hitler swindled von Hindenburg. It was not deflation that “caused” the rise of Hitler. If the economy was made weak by deflation, that is mainly because of a “hyperinflation phobia”. That phobia would not have existed had it not been for the prior hyperinflation. It is not necessary that there be some mechanistic timeline of inflation and deflation until malinvestment are cleared. There is a HUGE psychological component to it, and it is a main reason why there is such little price inflation today despite the Fed’s easy and very accommodative monetary policy. It is because people don’t forgot to easy. Even if malinvestment are cleared, it is not as if humans the world over will act like robots and go on as if nothing happened.

    The German people were so incredibly devastated by the hyperinflation that it took a very long time for them to “trust” inflation again. You seem to have no respect or inkling of the devastation hyperinflation wreaked on the German people. Oh what weak fools they were huh? Hyperinflation was sooooooo old wasn’t it! 10 years is plenty of time for people to forget their family members starving to death because they couldn’t afford to eat.

    How dare they not trust the same monetary authorities! How dare they not do their duty and obey and worship the monetary overlords.

    I said it before and I’ll say it again: The true believers on this blog who shout the slogans and push their inflation agenda are preaching insanity. This really is an insane asylum.

  27. Gravatar of Major.Freedom Major.Freedom
    8. April 2015 at 18:10

    Hitler was already politically powerful in Germany during the 1920s. The Beer Hall Putsch for example. Hitler already had his own friggin army during the 1920s.

    That incident brought him national attention. And not only that, but the very crowd he stormed into at the Beer Hall, after he fires his gun in the air, and demanded nobody could leave, after he spoke the crowd erupted in applause and cheers.

    Think about that. Why would the German people support a man who just walked into a Beer Hall with 200 machine gun armed SA stormtroopers threatening to kill the established party members?

    Why would so many German people be supportive of the leader of an army that attempted to overthrow the existing government?

    Do your homework!

  28. Gravatar of Edward Edward
    8. April 2015 at 18:40

    MF, the Beer Putsch was a failure. It landed Hitler in jail! As late as 1928 the Nazis, received just 2.6 percent of the votes, it took 1930 for them to take off.

  29. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    8. April 2015 at 19:12

    you wrote: “You (MF) mean to tell me it takes a decade to flush the “mal investments” caused by inflation out of the system?”
    The Austrian hypothesis is that malinvestments in the 2001-2007 may have been the cause of current low RGDP growth. People in this very blog defend that money is neutral in the long term, so, after 7 years of slow growth, it may well take nearly a decade to flush mal investments, if the austrians are right about their capital based cycle theory … I am sympathetic to this view, I personally don’t think that modeling productivity exogenous variables suffering random shocks around a trend line is correct. productivity may well be endogenous … And this view has nothing to do with an attack on NGDP targeting. Regardless of correctness or not of ABCT, NGDP is a great candidate for a nominal anchor, much better than the ones that were used in economic hystory, and failed, like the gold standard and inflation targeting….

  30. Gravatar of Ray Lopez Ray Lopez
    8. April 2015 at 20:22

    @Robazzi – sad but I see you slowly sipping the Kool Aid. There’s no empirical evidence for monetarism. At best (see the Sims et al paper, he won the 2011 Nobel) say it’s 20% leading and 80% led by the economy itself. You can also find neat patterns in random numbers, including, short term patterns in the stock market (which is largely random). A great mind like yours –as you have experience most here besides myself don’t–being ruined by the crowd you hang out with. And BTW it’s not MV = PY but = PQ, it makes a difference (see Richard A Werner’s paper I cited earlier).

  31. Gravatar of Saturos Saturos
    9. April 2015 at 00:09

    I’m more interested in Scott’s opinion on Bernanke’s previous post, specifically this paragraph:

    In a slow-growing world that is short aggregate demand, Germany’s trade surplus is a problem. Several other members of the euro zone are in deep recession, with high unemployment and with no “fiscal space” (meaning that their fiscal situations don’t allow them to raise spending or cut taxes as a way of stimulating domestic demand). Despite signs of recovery in the United States, growth is also generally slow outside the euro zone. The fact that Germany is selling so much more than it is buying redirects demand from its neighbors (as well as from other countries around the world), reducing output and employment outside Germany at a time at which monetary policy in many countries is reaching its limits.

    And also his thoughts on the gold standard further down.

    Additionally, the post before that, complaining about the global savings glut:

    where he says: “If a global savings glut is the cause [of below normal interest rates], then the right response is to try to reverse the various policies that generate the savings glut””for example, working to free up international capital flows and to reduce interventions in foreign exchange markets for the purpose of gaining trade advantage”. I’m not sure why he thinks it would be growth boosting for the world if Asians saved less.

  32. Gravatar of Saturos Saturos
    9. April 2015 at 00:10

    I got the impression that Scott views Bernanke as more of a monetarist at hard, constrained by less macroeconomically educated peers on the Fed board. But it seems to me that he was actually a lot more Keynesian than that all along.

  33. Gravatar of Saturos Saturos
    9. April 2015 at 00:27

    Bernanke is also not only convinced that his own policy was quite accommodative (as opposed to the theory that he knew he was being tight and was prevented from being less tight by his colleagues) but, is also using the “headwinds” argument that Scott would be happy to bash anyone else for using. A different standard for the ex-Chairman?

  34. Gravatar of ssumner ssumner
    9. April 2015 at 05:12

    dtoh, OK, but where are you going with this? If the policy implication is to reduce moral hazard in finance, I agree.

    Jose, I wish them well, but I am very skeptical as to whether that is a good indicator.

    Saturos, I just did a post on the Bernanke German post a few days ago.

    I’ve always viewed Bernanke as a New Keynesian. So far his blogging has not led to any surprises, he blogs like a New Keynesian. His views seem to be the views we already suspect he held.

    As for not being critical of Bernanke, read the previous 3000 posts, you’ll find a few hundred that are critical.

    Also, you probably did not read this post to the end, where I was critical of Bernanke in exactly the way you ask me to be critical.

  35. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    9. April 2015 at 05:20

    I will eventually read the Sims paper, but I think systematic critics of MM fail to see a simple thing: let’s start with MV = something. M is hard to determine, V is volatile. But somehow MV is empirically remarkably stable, and one can measure it. Why not take that as a nominal anchor? Commodity money fixes (in the short term) M, we end up with V’s volatility. Moving to MV = PQ, Inflation target tries to stabilize P (growth). Look at how insane this is: one want to stabilize MV/Q, where one doesn’t control Q, and don’t know how to estimate nor M or V. Stabilizing MV, on the other hand, something one can measure directly, is far more sensible, and it does not matter how P or Q move, as long as their product is more stable. It looks lime a good idea …

  36. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    9. April 2015 at 05:22

    Last phrase in previous comment: “It looks like a good idea….”

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