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The Great Liquidity Demand Shock

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I  have been arguing here for some time that the Great Recession of 2007-2009 was nothing more than a pronounced money demand shock that the Federal Reserve failed to fully offset.  As a consequence, nominal spending collapsed and given sticky prices the real economy crashed too.  This seems self evident to me and other so called quasi-monetarists (a term coined by Paul Krugman) like Scott Sumner, Bill Woolsey, Nick Rowe, and Josh...
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Why the Surge in Commodity Prices?

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Paul Krugman explains the main reason for the rising commodity prices: [T]oday, as in 2007-2008, the primary driving force behind rising commodity prices isn’t demand from the United States. It’s demand from China and other emerging economies. As more and more people in formerly poor nations are entering the global middle class, they’re beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies. There...
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Salvaging the Equation of Exchange

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Jim Hamilton is not a big fan of this equation: MV = PY,This is the famous equation of exchange where M is the money supply, V is velocity, P is the price level, and Y is real GDP.  Back in 2009 he questioned Scott Sumner's use of it in thinking about the economic crisis.  I replied that though it was just an accounting identity, it still shed some light on the economic crisis in its expanded form.  Now he is questioning its use as...
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The Case for Nominal GDP Targeting

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I am late getting to this, but Mark Thoma wants to hear the case for nominal GDP targeting.  This approach to monetary policy requires the Fed stabilize the growth path for total current dollar spending.  As an advocate of  nominal GDP level targeting, I am more than happy to respond to Mark's request.  I will  focus my response on what I see as its  three most appealing aspects: (1) it provides a simple and intuitive...
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Monetary Policy Quote of the Day

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Scott Sumner on the efficacy of monetary policy even when the policy interest rate hit zero:Zero rates don’t really make monetary policy more difficult, they make interest rate-oriented monetary policy more difficult... Permanent QE is just as effective as ever. Exchange rate depreciation is just as effective as ever, inflation targeting is just as effective as ever, NGDP targeting is just as effective as ever, commodity price targeting is just as...
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Monetary Policy Can Save the Eurozone, For Now

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The Weekly Standard has an article by Christopher Caldwell on the challenges facing the Eurozone.  It is an interesting article that has as its main thesis the following:Europe’s countries now face the choice of giving up either their newfangled money or their ancient national sovereignties. It is unclear which they will choose.This is a conventional view, but is it correct? Are the choices really limited to saving the Euro or preserving national sovereignties?  For the long-run the answer is probably yes. It is difficult to make a monetary union work without a political union. ...
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Lean Against the Credit Cycle Not Asset Prices

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Adam Posen does not think monetary policy should respond to asset price bubbles by adjusting its policy interest rate. He likens this approach to a using a hammer to fix a leaky shower:[I]f I have a hammer, it can be useful for all sorts of household tasks, but useless for repairing a leaky shower head – in fact, if I take the hammer to the shower head, I will probably make matters worse. I need a wrench to fix a pipe leak, and no amount of wishing will make a hammer a wrench. This is the essential reason why central bankers are now looking around for what has been called a ‘macroprudential...
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Taking the Long View

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It is easy to get caught up in the issues of the day and lose sight of important long-term structural developments. That is why I appreciate Niall Ferguson's work as it provides a broad, long-term perspective on recent events. Via Joe Wisenthal, here is Ferguson's latest interview where, among other things, he discusses the long-run outlook for the United States in terms of security, finance, and influen...
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  • Greenspan's Cult of Personality... Review topics and articles of economics: Alan Greenspan was a legend in his time and there was no shortage of praise for him back then. For example, who can forget Bob Woodow's 2000 book Maestro: Greenspan's...
  • Yes Tyler, Low Interest Rates Matte... Tyler Cowen is wondering whether the Fed's low interest rates in the early-to-mid 2000s really were that important to the credit and housing boom of the early-to-mid...
  • The Eurozone Crisis: Deja Vu... Review topics and articles of economics: Randal Forsyth sees similarities between the current unfolding of the Eurozone crisis and that of the U.S. financial crisis a few years back:Just as the problem on this...
  • Charles Plosser and the Burden of F... The Economist's Free Exchange blog is shocked to hear this from Federal Reserve Bank of Philadelphia President Charles Plosser:"Since expectations play an important role...
  • Arnold Kling and Expected Inflation... Review topics and articles of economics: What do we know about expected inflation? According to Arnold Kling not much if we look to financial markets:I'm also not convinced that we can read expected inflation...
  • A Paper on Stabilizing Nominal Spen... Given the recent discussion on stabilizing nominal spending as a policy goal I found this article by Evan F. Koenig of the Dallas Fed to be interesting: The article...
  • Why The Low Interest Rates Mattered... Review topics and articles of economics: This is the second of two posts detailing why the Fed's low interest rate policies in the early-to-mid 2000s was one of the more important contributors to the credit and...
  • Why The Low Interest Rates Mattered... This is the first of a two-part follow up to my previous post, where I argued that the Fed's low interest rate policy was a key contributor to the credit and housing...
  • The Stance of Monetary Policy Via t... Review topics and articles of economics: There has been some interesting conversations on the stance of monetary policy in the past few days between Arnold Kling, Scott Sumner, and Josh Hendrickson. Part of...
  • Scott Sumner's New Best Friend:... Joseph Gagnon is calling for $6 trillion more in global monetary easing. This should not be too hard to implement since the Fed is a monetary superpower.Update: The...
 
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