Wednesday, October 12, 2011

Big Bag of Money and Macro

History a la Sumner: US monetary policy didn't change permanently in 1979 with Volcker's appointment. It happened two years later:
The tight money of late 1979 was not really all that tight, and it lasted very briefly.  By late-1980 monetary policy was highly expansionary, indeed perhaps the most expansionary in my lifetime.  Only in mid-1981 did the Fed seriously commit to tight money.
How highly expansionary? Well, nominal GDP grew by ... 19%. That's some pretty high inflation for you.

Friedman emphasized how monetary policy was not loose in Japan, despite low interest rates, and his arguments apply just as well here when it wasn't loose for the last 3-4 years (HT: Tabarrok):
 it shows how unreliable interest rates can be as an indicator of appropriate monetary policy. The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity. ... They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.
Fengler at the World Bank shows some sloppy thinking about food price inflation. Food prices are going up in Kenya, but that does mean it is inflation. Inflation includes increases in wages and other forms of income. If food prices go up 100% and wages go up 100%, how are people worse off? Instead, we see food prices going up 25% and other prices going up 10%. That suggests that there is really 10% inflation and real food prices are going up by another 15% on top of that. That isn't inflation. Inflation is a "tax" on savings, it's a "tax" on holding cash in the sense that your money doesn't buy as much as it used to, but it is a tax that can be imposed by the outside as in this case, unlike any other form of tax that exists.

Evidence that the stock market corrects prices from false information within 7 days.

The original story of what monetary policy looks like as a babysitting cooperative. I have a feeling this is going to make an appearance next semester in my intro macroeconomics course.

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