Our profession is wrong about what went wrong, and hence doesn’t know how to fix the problem
Angus expresses what seems to be the standard view among economists:
Second, the Bernank actually helped to save our asses back in the darkest days of financial panic.
Actually the Fed caused the recession with ultra-tight money, at least according Milton Friedman and Ben Bernanke’s view of how to ascertain the stance of monetary policy. And no, it wasn’t merely “errors of omission”. I know that’s the standard response when I make that claim, but that’s because most economists have never looked at the data. The Fed brought base growth to a screeching halt between August 2007 and April 2008, triggering a recession. Then the Fed raised real interest rates on 5 year bonds from 0.57% to 4.2% between July and November 2008. Are those steps “concrete” enough?
Why does this matter? Because now you have lots of people claiming that “easy money” is hurting the economy. That it’s causing low interest rates and hurting savers. Then there’s another huge group that argues the Fed’s current tight money policy is expressly aimed at helping older retired savers. I view both arguments as silly, but I’ll address that issue in another post. The point is that until we figure out whether we have easy or tight money, there’s no possibility of making sensible policy judgments. If you believe that easy money is in effect now, then it’s only one small step to argue that it’s somehow associated with our current malaise. And then it stands to reason that tighter money will boost AD (I kid you not–there are people making that argument.)
Update: I didn’t mean to imply Angus was one making that argument, he certainly is not.
Angus continues:
Third, these are the same folks who generally believe that wages are too low and workers don’t earn enough compared to capital. Yet their solution to the low growth / high unemployment problem is for the Fed to lower wages?
That confuses secular problems with cyclical problems.
Fourth, the Fed cannot automatically control the real interest rate. Do you think the Fed could set inflation or inflation expectations at 10% and simultaneously hold nominal rates at zero?
No one claimed it could, and no one supports that policy. But if any increase in inflation expectations would merely raise nominal rates, then ipso facto we aren’t stuck at the zero bound, and the Fed should simply resume ordinary interest rate targeting. In that case I wonder what Angus would propose. At the end of his post he says he favors somewhat easier money. Well wouldn’t it be nice if we could accomplish that with ordinary rate cuts? Even Bernanke says he’d cut rates if he could. So this fourth point, which at first glance seems a clever application of the Fisher effect, actually undercuts Angus’s entire argument.
Fifth, NGDP targeting is not some magic bullet that would solve our current problems. It relies crucially on a particular path for expectations. If you think it’s easy for an actor who can’t easily make credible commitments to control expectations,
Actually it’s incredibly easy to target a nominal aggregate along a particular path. In the 1980s central banks all over the world started to buy into inflation targeting, and they all succeeded. Because Americans never pay any attention to events outside our borders, we attributed this success to the “wizardry” of Alan Greenspan. Boy, it sure was lucky that all the other developed country central banks also had Greenspan-like wizards at the helm!
No central bank has ever tried to inflate and fail, because it’s incredibly easy to debase a currency. Markets are 1000 times smarter than central banks. Believe me, if the central bank sets out to inflate the markets will know about the decision even before the central bank realizes it made the decision.
I personally support having the Fed try some additional unorthodox policies in the short run. Even if there’s only a .25 chance they significantly affect employment and growth, why not try? But I do not think the Fed is sitting on policies that will definitely cure our economic ills. The Fed is not close to omnipotent.
Let’s unpack this. The Fed is close to omnipotent over nominal aggregates. But it’s true that not all our problems are due to a nominal shortfall. In fact, as Tyler Cowen pointed out in a new post; “monetary policy matters less every day.” That’s an implication of the natural rate hypothesis. When there are adverse demand shocks, the economy naturally self-corrects over time. Some people ask me why it takes so long—haven’t wages and prices adjusted by now? Not completely, but the problem goes far beyond sticky wages and prices, it also includes sticky government policies and perhaps some hysteresis.
I’m going to develop these ideas further in the next post, which addresses Tyler Cowen’s recent post.
HT: Statsguy
Tags:
5. May 2012 at 11:20
Scott:
“When there are adverse demand shocks, the economy naturally self-corrects over time”.
That would be “adverse SUPPLY shocks”
5. May 2012 at 11:32
Marcus, No, I meant demand shocks. The SRAS moves to bring the economy back to the natural rate of output.
5. May 2012 at 11:45
Scott
That “SRAS move” isn´t clear to me.
5. May 2012 at 11:45
Superb blogging.
I am beginning to think the Fed, and central banks, are even more potent than even some Market Monetarists believe.
Consider Japan—they are imploding. Europe? Imploding. Both the ECB and and BoJ wanted really low inflation or even the nirvana of price stability.
China is booming—and they have an accommodative central bank.
The Fed is somewhere between China and the ECB/BoJ. And were are doing better than Japan-Europe, but not as well as China.
Sure, there are other factors. But there is a whole range of differences between Europe and Japan and yet tight money is over-riding all of those differences, producing roughly the same results.
And, (con tray to popular opinion) perhaps China has more structural impediments (corruption, CCP planning, lack of skilled and educated workers, need to devote resources to infrastructure) than other more-developed nations—yet is obtaining great growth anyway.
Money is powerful. People will hustle—work, invest–if they think they can get wads of cash into their hands.
I will tell you when printing more money won’t work. When you drop a Ben Franklin on the sidewalk, and no one hustles to pick it up. Let me know when that happens,and I will join the gold-nuts.
5. May 2012 at 11:54
Scott, I’d like to go another round about oil prices: if you look at CPI and you look at oil prices; the two look decoupled. You’ve suggested before that oil prices don’t matter–and cite as evidence that oil Isn’t in the core CPI market basket.
That argument hasn’t convinced me because when the fed inflation targets core CPI, the variation in core CPI naturally starts to appear decorrellated in the time series statistics with something the fed doesn’t target such as oil prices.
You cannot conclude from that though that oil prices aren’t a dominate component of consumer prices. Rather what could well happen is that the fed tightens policy to hold core CPI constant which reduces the inflation of other inputs such as labor to offset the effect of oil prices. This is particularly the mechanism when growth in oil prices is not an inflationary process but reflects growing demand from countries such as china.
Thus, the slow growth is due to the economy bring oil constrained. Any uptick in output drives up oil demand which in turns due to supply in elasticity bumps the price of oil and forces the Fed to tighten policy to hold core CPI constant.
Basically ngdp is low not because the fed is talking wrong but because the real growth we can get is constrained by oil and the inflation target is fixed. There may be no ngdp growth path a 5% without a higher inflation rate.
So it is not about communicating expectations better or about the fed being short on tools; it is about the commitment to 2% inflation and the implication that has given SRAS on the growth in output.
The has said clearly that they don’t want to adopt a higher level of inflation because they understand that money is super neutral. A higher rate of inflation is just goon to leave us with the same slow real growth later unless the government acts to improve economic effeciency with supply side policy: lower rates on capital (expectations mean that the tax hikes one year hence have already taken effect in capital market pricing) and reduction of regulatory barriers such as those constraining oil output.
(btw, I don’t actually want to take a one issue point regarding oil; it was just easier to write out the post from that simplified view.)
5. May 2012 at 12:00
Scott
Forget it. I “got it”.
5. May 2012 at 12:02
I might be confusing natural rate hypothesis with (changing) trendline, but here goes: It does not seem that supply side structure has changed in any significant aggregate way since 2008, especially if one contrasts technological development that continued apace in the Great Depression. (not considering government supply side changes, but changes by business) Instead, non housing stock is held with expectations of little change, while some housing stock is held with anticipation of quiet deleveraging on the creditor’s timeline. Or in other words, people expect the economy to be able to do its thing ‘any time now’. To me that implies the target level could still be wider than supposed, unless more deleveraging is planned than anyone really speaks of.
5. May 2012 at 12:21
keep changing the consensus opinion,
one
fracking
economist
at
a
time.
whew! time to go to the beach.
5. May 2012 at 13:06
btw, with regard to the Einhorn article: the best way to accelerate the “balance sheet repair” process is not the raise rates but to give them more income and boost AD; mortgage equity withdrawl is about 2.2% of disposable income. but you knew that.
5. May 2012 at 18:10
And the profession won’t work out what went wrong if, like Raghuram Rajan, they fail to discuss the a developed country that did lots of supply-side reforms of the type he is so keen on and sailed through the GFC and Great Recession with barely a ripple because it fails to conform to the story he wants to tell about the GFC and Great Recession.
5. May 2012 at 19:49
They say imitation is the most sincere form of flattery.
Beyond that, I am naturally uncomfortable with someone else making comments using my real name. It could cause misunderstandings, or even bad feelings.
Whoever is posting using my name, please cease. I enjoy this forum every much, and its author.
5. May 2012 at 21:34
Good Jesus.
Bill Clinton as President acted very differently than Obama. Forget the circumstances, other than “lots of debt” – what did Clinton do?
He gave up on growing the state, he met with Greenspan, and literally overnight he towed the line.
I’m not saying Ben is Obama’s real boss, Im saying the hegemony, what Karl calls the “the polity” they do not want to government to grow.
it is THAT SIMPLE.
The hegemony is the Tea Party, mostly is the backbone of American ownership, the taxpayers, the landlords, the landowners, the Man Street employers, it is a GIANT muscular beast and if push comes to shove, it can and will gut DC, it can and will gut Wall Streets.
And Ben Knows it.
Greenspan Knew it.
Clinton Knew it.
And right now, I suspect even obama Knows it. I don’t think Obama is a dead ender for liberalism, I think saying he is is ok, but I think deep down, he’s human, and he knows he was naive, drinking his own Kool-Aid and listening to Rahm tell him he could remake America.
To analyze political economy, you really do need to compare OWS to theTea Party.
What I think you need to understand is resolve.
You barely saw what the folks who are the HOME TEAM, are really willing to do, if pushed.
It is so powerful, that their anger is enough for SCOTUS to be seriously thinking about notching the high water mark for Federal power, and literally sending the pendulum backwards… because of the Tea Party.
Meanwhile, OWS if they ever got serious, would be tried as criminals, for some reason or another.
But intellectually, many of you kind of equate the two groups as similar. It’s weird that you are so willfully naive.
What you need to ask yourself is HOW can this group be so powerful??
And that’s the answer. There are likely 50M+ people who will spend some part of their economic earning lifetime in the 80-99%, and moe who get close enough to aspire to it.
And they all vote. They all pay real taxes. They own their homes. They own 200M guns. They write the political donations, they fund the churches, they run the charities, they raise the GOOD KIDS.
The real vested ownership difference between the top 40% and the bottom 60% is ginormous.
—–
So when you start asking yourselves questions out loud in intellectual company about WHY all these completely “illogical” things are happening:
1. check your premises.
2. don’t CRY about “the polity”
3. ACCEPT reality as men, and meet it for what it is.
4. Form policy that heeds reality, even if you are routinely getting 25% of the upside while the hegemony get their 75%.
5. Do not pretend that YOU are special enough to sway the hegemony and get more of what you want.
1-5 is just you admitting that YOU are in a game theory situation, and the beast you playing with… you KNOW deep inside its true nature, and you KNOW it cannot be reasoned with.
So game it out.
Once you know for sure,what it will not accept, its on you bub… its on you to maximize your own outcomes, even if you have to do it form a postion of publicly admitting you are but the C player.
5. May 2012 at 22:10
Lorenzo,
The RBA simply followed Svensson’s recipe (like Sweden did: get the currency down and circumvent a big part of the stickyness problems). Meanwhile it retained a reasonable distance from the zero-bound. But it is interesting that a dual mandate (but politically different from the Fed’s) CB. I guess that simply looking at the outcomes (so far) and ignoring a few essentials: “China” is a net plus for Oz AD (it may have a deflationary effect in the US); The financial services industry is sounder (not necessarily fundamentally so, it is highly undiversified so, IF the country goes, the banking system will behave like an EUR peripheral’s) . The country has little public debt.
The US cannot use the FX route. It has high debt levels (plus astronomical contingent liabilities) making monetary policy the only tool available in an election year and that means a kiss of death on the CB if the incumbent loses. The Fed is not as independent as the RBA. Employment is a low priority for the Republicans. Not to say that an outcome (if it could be produced, which I doubt, mainly for political and institutional reasons) of a NDGP levels growing along a stable trend would not be desirable.
Also, the RBA operates in a political vacuum, a corollary of coalition government (not: Coalition gvt..) in a system not suitable for it.
6. May 2012 at 04:02
I’d like to make it clear to your readers that while I am 1000% percent guilty (and unrepentant) of the crime of not being a market monetarist, I do NOT think that “”easy money” is hurting the economy”.
6. May 2012 at 05:51
“The Fed brought base growth to a screeching halt between August 2007 and April 2008, triggering a recession”
If you weren’t so “stuck” on Milton Friedman you might have “fine tuned” this. Dr. Leland Pritchard (Ph.D. Economics, Chicago, 1933, MS, Statisitics, Syracuse) “had a better way”. It would literraly end up as Volcker’s, Greenspan’s & Bernanke’s “coup de grace”.
“Then the Fed raised real interest rates on 5 year bonds from 0.57% to 4.2% between July and November 2008”
If you studied “Black Monday” you would find that the causes of the crash were identical in that respect.
6. May 2012 at 05:58
Marcus, When AD shafts left, the standard model says wages eventually fall and SRAS shifts right, bringing you back to the natural rate.
Ben, You said;
“I will tell you when printing more money won’t work. When you drop a Ben Franklin on the sidewalk, and no one hustles to pick it up. Let me know when that happens,and I will join the gold-nuts.”
Careful, or you’ll scare away our natural allies. 🙂
Jon, I agree that oil is a problem, I just don’t think it is the main problem. Despite oil constraints, with easier money we could get much faster RGDP growth. You don’t see oil slowing China’s growth (very much.)
With 7% NGDP growth I think we’d get about 4% RGDP growth, at least.
Becky, The labor force growth has slowed dramatically (emigration, early retirement, disability, etc, etc.) which slows the supply-side somewhat. Oil is also a problem. but I think it’s mostly demand-side, as you say.
dwb, Good point.
Lorenzo, And I think I know what country you are talking about.
Ben, I’ll see if I can block him, if it becomes a problem.
Angus, Sorry if I left that impression, I certainly agree you did not make that claim. I’ll leave an update.
6. May 2012 at 06:14
As soon as Bernanke was appointed to the Chairman of the Federal Reserve, he initiated (coinciding both with the end of the housing bubble, & the peak in the Case-Shiller’s National Housing Index in the 2nd qtr of 2006 @ 189.93), a “contractionary” money policy for 29 consecutive months, or at first, sufficient to wring inflation out of the economy, but persisting until the economy plunged into a depression).
Note: A “contractionary” money policy is defined as one where the rate-of-change in monetary flows (our means-of-payment money times its transactions rate of turnover) is less than 2% above the rate-of-change in the real output of goods & services (MVt’s roc’s were NEGATIVE (less than zero), for 29 consecutive months).
The FOMC continued to drain liquidity despite its 7 reductions in the FFR (which began on 9/18/07). I.e., despite Bear Sterns two hedge funds that collapsed on July 16, 2007, & immediately thereafter filed for bankruptcy protection on July 31, 2007, the FED maintained its “tight” money policy [i.e., credit easing (mix of assets), not quantitative easing (injecting reserves)].
An asside note: Nominal gDp’s 2 year rate-of-change (which equals what the FED can control — i.e., MVt), peaked in the 2nd qtr of 2006 @ 12%. Bernanke let it fall to 8% by the 4th qtr of 2007 (or by 33%). It fell to 6% in the 3rd qtr of 2008 (another 25%). It then plummeted to a -2% in the 2nd qtr of 2009 (another [gasp] – 133%).
I.e., Bernanke didn’t initiate an “easy” money policy until Lehman Brothers later filed for bankruptcy protection (& it was one the Federal Reserve Bank of New York’s primary dealers in the Treasury Market), on September 15, 2008. The next day AIG’s stock dropped 60%.
By waiting to inject liquidity, risk aversion was amplified, haircuts were increased, additional and/or a higher quality of collateral was required, liquidity mis-matches grew, funding sources dried up, long-term illiquid assets went on fire-sale, withdrawal restrictions were imposed, deposit runs developed, forced liquidations lowered asset values, counterparties’ credit default risks were elevated — all of which contributed a general crisis of confidence (not regulatory malfeasance, avoidance, or circumvention).
6. May 2012 at 09:25
As to oil, does it make sense to say that higher prices adversely affect AS in terms of velocity, but not AD as velocity justs shifts from one consumer to the next? (in an open economy)
6. May 2012 at 12:37
Scott, let’s assume the unemployment rate really is 11.1%:
http://blog.american.com/2012/05/the-awful-april-jobs-report-is-the-real-unemployment-rate-11-1/
What’s your argument NGDP, that it would be 14% without QE?
Thats ok if it is… I just want to understand.
7. May 2012 at 01:13
Rien: Looking at the data, surely the A$ just followed commodity prices down and then up again. I doubt RBA policy had much to do with it; the RBA has a history of resisting calls to “do something” about the exchange rate.
As for the US not using the FX route, the US$ has been falling against the $A, $Can, Yen; the Euro and the Pound not so much.
Regarding the Fed not being as independent as the RBA, I would put it differently–the RBA is more accountable than the Fed. The RBA has an explicit target agreed between the RBA Governor and the Treasurer (and, btw, the Secretary to the Treasury is on the RBA Board). So it has an explicit target that it is publicly committed to and can be judged against.
Also, the RBA operates in a political vacuum, a corollary of coalition government (not: Coalition gvt..) in a system not suitable for it. I have no idea what you mean here. It seems to me that the RBA is, if anything, more at the centre of politics than the Fed. I cannot imagine any Australian Government leaving seats on the RBA Board vacant. If it did not have someone ready to go when a Board Member’s seat became vacant, it would be crucified by the media, by business and by the Opposition for incompetence.
Remember, lots of indebted homeowners in marginal seats with flexible mortgages–interest rates matter!
7. May 2012 at 01:19
Scott: I bet you do :). I blogged about it and have ended up trying to be patient with an internet Austrian. Sigh.
But really, even leaving aside testing one’s hypothesis with an available example, how can a point that is clear enough to a high school student, no matter how scarily smart, evade a full professor?
7. May 2012 at 06:10
What rot.
“The Fed [lowered] real interest rates on 5 year bonds from [2.39]% to [0.79]% between [August 2007] and [April] 2008. Are those steps ‘concrete’ enough?”
Ridiculous.
7. May 2012 at 06:36
Becky, The main affect would be on AS, but AD might be affected slightly.
Morgan, Higher w/o QE, but it’s hard to say how much higher, probably not 3% higher.
Lorenzo, Yes, that’s a good post by Evan.
DR, You said;
“What rot”
Yes, real interest rates are rotten indicators of the stance of monetary policy, as is the monetary base.
7. May 2012 at 07:17
“Yes, real interest rates are rotten indicators of the stance of monetary policy, as is the monetary base.”
Then please defend this statement: “And no, it wasn’t merely ‘errors of omission’.”
My rolling eyes are giving me a headache.
7. May 2012 at 07:27
“Marcus, No, I meant demand shocks. The SRAS moves to bring the economy back to the natural rate of output.”
If AD falls, lowering prices, an AS correction bringing the economy back to its old level of output would require an additional fall in prices. No?
7. May 2012 at 15:43
Actually the Fed caused the recession with ultra-tight money
Actually that’s false, since the Fed also had tight money after the collapse of 1920, and no depression followed, just a period of correction which is called a recession.
And no, it wasn’t merely “errors of omission”. I know that’s the standard response when I make that claim, but that’s because most economists have never looked at the data. The Fed brought base growth to a screeching halt between August 2007 and April 2008, triggering a recession. Then the Fed raised real interest rates on 5 year bonds from 0.57% to 4.2% between July and November 2008. Are those steps “concrete” enough?
If the Fed kept printing to prolong the bubble, the result would have been accelerating inflation and taking the monetary system even closer to currency collapse.
Why does this matter? Because now you have lots of people claiming that “easy money” is hurting the economy. That it’s causing low interest rates and hurting savers.
Easy money is hurting the economy, because it is introducing more malinvestment, in addition to preventing previous malinvestment from being liquidated and re-allocated. The low interest rates are misleading investors once again.
Interest rates are lower than they otherwise would be because the Fed is inflating money into the banking system. They are not lower because the Fed is not inflating enough.
The point is that until we figure out whether we have easy or tight money, there’s no possibility of making sensible policy judgments.
You will never be able to know this as long as money production is monopolized by the state, by force, the same way you will never know how many tons of iron should be produced if the state monopolized car making by force.
This information, as Hayek has shown, is borne out of the market process itself.
You cannot ascertain how much money should be printed, or whether or not money is tight or loose, from without the market process itself, by observing past history and looking at the stars to some up with a “scientific” assessment.
You have allow money production to be integrated into the market process itself, which means abolishing the state monopoly over it, before you can know how much money there should be, how much spending there should be, and how high or low interest rates should be.
This is why central planning doesn’t work. It’s because the requisite knowledge of pricing and production doesn’t exist in central planning brains. It exists in the separate brains of individual market participants.
If you believe that easy money is in effect now, then it’s only one small step to argue that it’s somehow associated with our current malaise.
Money is easy now. M2 is rising at 10% annually. That loose money is now making NGDP rise at pretty much the same rate as it was pre-2008 collapse, when all the errors were building up, just waiting for the Fed to merely reduce the rate at which it printed money, which then allowed the market to decide money spending, which of course as a lot lower than what the Fed deemed as correct, hence the spending collapse, and correction thereafter. Of course the Fed started to inflate once more, thus preventing corrections, and that’s why easy money is currently harming the economy. It is harming the economy by preventing corrections from taking place, as well as adding new errors into the mix, which of course will lead to inevitable correction as soon as the Fed reduces inflation by whatever new degree sets into motion the corrections.
And you’ll be there to make the same correlation is the same thing as causation claim once again, saying that the fall in spending is what caused the problem, rather than identifying what would have made people decrease their spending without the Fed reducing the money supply, indeed with the Fed still increasing it.
And then it stands to reason that tighter money will boost AD (I kid you not-there are people making that argument.)
Tighter money will boost the speed of corrections, which will then boost the solution of capital structure errors prevailing in the economy, which will then allow for more sustainable production going forward. Of course AD will fall, as AD is just money spending, but AD should fall if the market makes it fall even if the Fed isn’t removing money from the economy. If the Fed isn’t removing money from the economy, and yet spending falls via the market process, then that shows the Fed brought about too much inflation prior.
8. May 2012 at 05:18
DR, I think monetary policy is NGDP expectations. Others disagree, saying “no, it’s changes in the money supply, or changes in real interest rates.” My response is “OK, why did the Fed stop increasing the base in late 2007 and early 2008? Why did they sharply raise real rates in the teeth of a severe financial crisis.” For those who think that is “Fed policy” it’s something to think about. But I find most people ignore this data, they’ve made up their minds and don’t want to be bothered with facts.
The answer to your second post is Yes.
MF, Fed policy during the 1921-23 recovery was far more expansionary then during this recovery. That’s why it was faster (plus wages were more flexible back then.)
8. May 2012 at 05:29
ssumner:
MF, Fed policy during the 1921-23 recovery was far more expansionary then during this recovery. That’s why it was faster (plus wages were more flexible back then.)
You mean 1922 on. During 1921, the Fed was still abstaining.
The recovery that was based on a relatively large wage rate decline without any Fed intervention preceded the expansion later on which then stopped wage rates from falling, and why you are now saying “real” wages didn’t fall by as much was “needed.”
8. May 2012 at 08:02
Scott,
Everyone understands you wish for NGDP expectations to be managed. Furthermore, I think most understand that you do not believe fiscal policy can manage NGDP expectations because monetary policy can always undermine fiscal policy.
But when you say “OK, why did the Fed stop increasing the base in late 2007 and early 2008? Why did they sharply raise real rates in the teeth of a severe financial crisis.” you are full of it.
The Fed never stopped increasing the base. OK, never is a bit extreme, given that the base contracted numerous times from 2003-07 (as it had in the mid-1990s.) But the base has never shrunk over any twelve-month period since before the previous recession. Seems like a more appropriate question is why has the Fed permitted a more or less steady downward trend in base growth from 10 percent in 2002 to closer to 1 percent by 2008. But there’s nothing particularly unusual about the trend in 2007-08. Furthermore, MZM had grown more than 12 percent over 2007, and 15 percent from mid-2007 to mid-2008.
The Fed, of course, never raised rates during the financial crisis. You’re actually asking why they let inflation fall. Which is a legitimate question, but not *necessarily* very interesting given the 2007-08 boom and bust in petroleum prices. An 80 percent fall in the price of crude (including about 65 percent in the four months you mentioned) is going to have some disinflationary impact. But should they have been more aggressive in response? Perhaps they should have been raising rates during the oil boom? But the bottom line is that you obfuscate by implying the Fed caused the rates to rise when that’s the very question at hand.
No, I don’t see your questions as at all probing. They do not help clarify whether the outcomes were the result of (ex-ante) bad policy versus (ex-post) bad outcomes in the economy. Rather, they seem better designed to confuse people.
8. May 2012 at 08:50
Scott,
So if an AS correction to a fall in AD requires disinflation (or a fall in prices, depending on how you’re looking at it) then this is merely the flip side of your fiscal-impotence argument. The Fed will fight the fall in prices with more expansionary monetary policy which you hope will move AD rather than AS.
I say “hope” here simply because I know you don’t like IS/LM or IS/MP so I’m not sure of your general model of adjustment.
In any case, I’m awfully skeptical of policy aimed at increasing AS when the profit share is relatively high and unit labor costs are relatively low. Absent increased demand, what incentive would you offer for increasing production?
10. May 2012 at 06:36
DR, You don’t know all the background here. For instance, you said;
“The Fed, of course, never raised rates during the financial crisis. You’re actually asking why they let inflation fall.”
That completely misses the point. When I complain that high rates can’t possible be easy money, everyone says “well of course we mean real interest rates, we all agree nominal rates are meaningless. The Fed controls monetary policy by moving real rates up and down.”
And now you are saying real rates aren’t the right indicator. I feel like I am trying to nail jello to the wall. Tell me what you consider easy and tight money, and then we can have a conversation.
You are flat out wrong about the monetary data. The base rose about 5% a year for many years up to mid-2007, and then completely stopped growing at all for about 8 months. I got that data from the St Louis Fred website.
I don’t understand your second comment. I also oppose relying on AS shifts, and support an increase in AD. What exactly is your point? I was simply describing the standard NK model as taught in EC101 textbooks.
13. September 2013 at 20:19
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