Scott Sumner  

Eighty years later and the results are the same

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Back in 1933 the US had experienced years of deflation and nominal interest rates were close to zero.  FDR sharply devalued the dollar over a period of 10 months, and stock prices closely tracked the value of foreign exchange during this period of monetary stimulus.  Last year the Japanese did the same, and Marcus Nunes has a great post showing that the results were pretty similar.  Here are some of his graphs:

 Screen Shot 2014-01-16 at 6.28.27 PM.png
That certainly looks like a positive correlation.  Some people will say; "QE only helps the asset markets, it doesn't boost NGDP."  I don't know how something could dramatically impact stock prices without impacting nominal spending, but in any case NGDP growth picked up in Japan last year.

Others will ask; "What makes you think higher NGDP growth will lead to higher RGDP growth?" This does:

Screen Shot 2014-01-16 at 6.27.31 PM.png
Again, that's pretty similar to what occurred in 1933.  Another complaint is that currency depreciation is a "beggar-thy-neighbor" policy, which doesn't work at a global level.  The worry is that it simply steals jobs from other countries.  And yet after the devaluation of 1933 US imports actually grew faster than our exports. Marcus shows that the same thing happened last year in Japan:

Screen Shot 2014-01-16 at 6.28.01 PM.png

Marcus explains why:

This is indicative that the income effect of the expansionary policy was stronger than the terms of trade effect of the exchange devaluation. In other words, it reflects an increase in domestic demand.

Marcus Nunes is the master of graphical analysis, and his post has four other nice graphs. Strongly recommended.

Comments and Sharing

COMMENTS (5 to date)
Brian writes:

Maybe I'm missing something, but I don't see where the import/export graph shows faster growth for imports. The increases look about the same to me.

Otherwise, it's a very interesting look at the effect of current Japanese policy. Things seem to be working as advertised.

Scott Sumner writes:

Brian, The graph shows rates of change, not levels.

Brian writes:


Thanks. That makes more sense. I think, though, that the axes would benefit from some labels. For example, I didn't think the import/export graph was rates of change because the numbers are do high. Are these annual %, so that imports increased at ~27% annual rate in month 10, for example, or do the numbers show something else?

Marcus Nunes writes:

Sorry for my incompletness. The data are growth rates %YoY. Notice how both imports and exports showed no growth, taking off as soon as "Abenomics" takes effect. Exports rise (devaluation) but imports rise even faster (the income effect)

Greg Jaxon writes:

What you're calling an "income effect" could also be a dishoarding of yen-denominated assets in favor of hard assets or non-yen-denominated holdings that have to be imported.

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