1. Reflationists receive a smackdown over at Naked Capitalism. There the guest blogger Washington takes to task all those observers who claim we can inflate our way out of the debt crisis. He notes that any inflation benefit will be offset by problems from higher interest rates and creditors fleeing the United States. I am not sure the reflationists of the world ever claimed we should (or even could) eliminate all of our debt problems with inflation, only that we could lighten the real debt burden enough to allow for faster economic recovery. The slightly higher inflation could also be part of a plan that would do more than just lower real debt burdens. It would also increase inflationary expectations--if the higher inflation were perceived to be permanent--and thereby increase current spending.
2. Speaking of smackdowns, George Selgin provides one to the central banks of the world. He argues central banks by default tend to create financial instability:
If you find this topic interesting see his talk last year at the CATO monetary policy conference.The present financial crisis shows how central banks can fuel the financial booms that make severe busts possible. Unfortunately, theoretical discussions of central banking badly neglect its role in fostering financial instability, in part because they ignore its history and political origins.
3. Further evidence from Marco Del Negro, Gauti Eggertson, Andrea Ferrero, and Nobuhiro Kiyotaki that monetary policy does not run out of ammunition once the policy interest rate hits the lower zero bound:
This paper extends the model in Kiyotaki and Moore (2008) to include nominal wage and price frictions and explicitly incorporates the zero bound on the short-termnominal interest rate. We subject this model to a shock which arguably captures the 2008 US financial crisis. Within this framework we ask: Once interest rate cuts are no longer feasible due to the zero bound, what are the effects of non-standard open market operations in which the government exchanges liquid government liabilities for illiquid private assets? We find that the effect of this non-standard monetary policy can be large at zero nominal interest rates. We show model simulations in which these policy interventions prevented a repeat of the Great Depression in 2008-2009.The authors conclude, then, that the Fed can have meaningful influence on the economy even when short-term interest rates are at zero percent. If so, then why did not the Fed do more in late 2008 and early 2009 to prevent The Great Nominal Spending Crash?
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