Bryan Caplan and David Henderson

Monetary Policy

A Category Archive (293 entries)
This is beginning to sound like a broken record. A reformist right-wing government does lots of good things, trimming the size of the public sector. It promises monetary stability but delivers instability---a contractionary monetary shock. This time it was in... MORE

This has to be one of the most amusing things I've read all year: The problem comes from believing that QE is some magic growth elixir. The world's Keynesians have convinced themselves that the U.S. is now growing faster than... MORE

Reply to Scott Sumner on Global Warming

Economic Methods
David Henderson
Scott Sumner writes: I recall that when liberals favored lots of "command and control" regulation to address global warming, and conservatives favored a carbon tax. That was the "market solution" comparable to the market-based approach to reducing sulfur emissions from... MORE

Four things I believe

Monetary Policy
Scott Sumner
Here are four things I strongly believe to be true: 1. The Great Recession was caused by tight money at the Fed, and other major central banks. Period. End of Story. 2. Fed policy almost never strays far from the... MORE

Mr. Bernanke vs. the Structuralists

Monetary Policy
Scott Sumner
Vaidas Urba sent me an interesting piece from the Financial Times: For macro investors, the end of summer is usually signalled by the Kansas City Fed's annual conference at Jackson Hole. On occasions, former Fed chairman Ben Bernanke used this... MORE

Richard Timberlake on Money

Monetary Policy
David Henderson
EF [Econ Focus}: Let's start with a unifying theme of your work: Your support of a gold standard. Several great neoclassical monetary theorists -- Marshall, Walras, Wicksell, Fisher, and Keynes -- argued that a rules-based fiat money could outperform a... MORE

Never reason from a bond price change

Monetary Policy
Scott Sumner
Here's Brad DeLong: I have to say that most of what I have quoted from Nick seems wrong to me. Yes, in 1982-1983 it was true to say "it became harder than normal to sell other goods for money... MORE

Nominal GDP targeting in developing countries

Monetary Policy
Scott Sumner
Commenters Patrick Sullivan and gofx directed me to a post on NGDP targeting in developing countries, by Pranjul Bhandari and Jeffrey Frankel: Targeting Nominal GDP has been proposed in the context of major industrialised countries. (Frankel, 2012, gives other references... MORE

When supply is demand

Macroeconomics
Scott Sumner
In order to do good economic analysis, it is important to distinguish between supply and demand shocks. Commenter SG pointed me to this curious post by Paul Krugman: For those new to or confused by the term, secular stagnation is... MORE

Tyler Cowen on ECB policy

Monetary Policy
Scott Sumner
Here's Tyler Cowen commenting on ECB policy options for addressing lowflation: 2. Nominal gdp targeting. In general I like this idea, but which ngdp gets targeted? Eurozone ngdp, presumably. But when you have multiple countries, individual countries can end up... MORE

Wolfers on the fiscal consensus

Monetary Policy
Scott Sumner
Justin Wolfers points to a survey showing overwhelming support for the notion of a positive fiscal multiplier in early 2009: The Initiative on Global Markets at the University of Chicago -- hardly a hotbed of liberal or Keynesian thought... MORE

"Helicopter drops" are a bad idea at any time

Monetary Policy
Scott Sumner
Market monetarists tend to prefer using monetary policy to stabilize the path of NGDP, not fiscal policy. We are skeptical of the efficacy of fiscal policy, and also view it as being inefficient. Now David Beckworth has suggested that a... MORE

AD: Eleven stages of enlightenment

Monetary Policy
Scott Sumner
Over at TheMoneyIllusion I've been having a discussion of aggregate demand. What does the term actually mean? In the comment section I see lots of average people giving common sense explanations, and also experts like Nick Rowe making high-level arguments.... MORE

Yes, I'm being sarcastic. I associate this view with American liberals. It often seems that when there is a problem such as the 2008 financial crisis, they immediately assume "the market" is to blame, and "more regulation" is the answer.... MORE

There are two kinds of people . . .

Macroeconomics
Scott Sumner
Ideology is perhaps the most common way of dividing economists into groups. You have Allan Meltzer on the right, and Paul Krugman and Joe Stiglitz on the left. Today I'd like to argue that in one very important way it... MORE

In my fire in 2007, I lost almost all my files, including the ones under the letter "R." For that reason, I thought I had lost my correspondence with Murray Rothbard. But I came across some files in my home... MORE

Mr. Krugman's peculiar post

Macroeconomics
Scott Sumner
Paul Krugman seems annoyed by the recent modest success of market monetarism, at least in terms of becoming part of the discussion. But the post contains only one tiny critique of our actual policies: I don't buy this on the... MORE

When is nominal GDP targeting optimal?

Macroeconomics
Scott Sumner
Commenter Felipe sent me to an interesting Jeffrey Frankel post on NGDP targeting: There are good reasons to think that NGDP targeting is better suited to emerging and developing economies than to industrialized countries. These economies are more frequently subject... MORE

Up until 2008 I had a sort of "Whig view" of Fed history. They made many mistakes, but learned enough from those mistakes to gradually improve. Now I'm not so sure. Here are 6 policy regimes, all excessively procyclical: 1.... MORE

Fiscally inefficient monetary policy

Macroeconomics
Scott Sumner
Here is Noah Smith: Abe is the most effective national leader in the world right now. I never thought I'd say this, but he's an example that the rest of the world should be following. This time around, Abe didn't... MORE

Never reason from an interest rate change

Monetary Policy
Scott Sumner
I occasionally point out that the European Central Bank raised interest rates several times in 2011, triggering a double dip recession. At other times I argue that interest rates are not a reliable indicator of the stance of monetary policy.... MORE

According to a report in the Tennessean by way of AL.com, "gains in whiskey sales are outpacing increases in production by 'at least' a 2-to-1 margin...The Jack Daniel distillery announced a $100 million expansion in distilling and warehouse space." Reports... MORE

Wolfgang Munchau has a nice article in the Financial Times on inflation targeting. I agree with much of what he has to say, but will offer mild criticism of two points. Here's how Munchau begins: Back in the 1990s... MORE

Tom Brown sent me to an Austrian critique of monetary stimulus (in this case negative interest on reserves): Negative deposit rates" means that the banks will charge the customer for saving money and placing it in the bank. According to... MORE

What is monetary policy?

Monetary Policy
Scott Sumner
When I use the term 'monetary policy' it refers to actions taken by the monetary authority aimed at influencing the supply or demand for base money, with the ultimate objective of influencing a broader set of macro variables, such as... MORE

Never debate the impact of a price change

Monetary Policy
Scott Sumner
There as been a lot of recent discussion about the "Neo-Fisherite" claim that higher interest rates lead to higher inflation. Noah Smith has a good summary. Unfortunately the debate has been marred by a lack of precision. What is being... MORE

Broadly speaking, there are three approaches to stabilization policies and business cycles: 1. Stop the excesses: In this view, monetary policy is too expansionary at certain times. Some people worry about excessive real GDP growth. Others worry about asset prices... MORE

Even before Mark Carney took over as Governor of the Bank of England, he showed signs of independent thinking. Most famously, he came close to endorsing NGDP targeting at a speech in Toronto during early 2013. More recently, he hinted... MORE

A pragmatic view of causation

Monetary Policy
Scott Sumner
I'm not trained in philosophy, but I do regard myself as a philosophical pragmatist. So when I grapple with issues of causality I try to imagine which definition of 'causation' is the most useful. Consider two possible causes of WWII:... MORE

Great line from Lars Christensen.  Read the underlying facts.... MORE

My San Francisco Fed Talk

Monetary Policy
David Henderson
Last Wednesday I gave a talk at the San Francisco Federal Reserve Bank. The event was the "2014 Conference of Twelfth District Directors." I was one of three presenters. See here for the other two. The session was on "Bubbles"... MORE

Central banks do not deserve our respect

Monetary Policy
Scott Sumner
Nor (in my view) do they deserve our contempt. They should be viewed skeptically. They are trying to do a good job, but often fall well short. One such occasion occurred in 2011 when the ECB tightened monetary policy. Prior... MORE

Jeremy Stein gave a speech that advocated adding financial risk to the Fed's traditional dual mandate. Or at least targeting risk in the hope that it makes it easier to fulfill its traditional mandate. I see lots of potential problems,... MORE

The Legacy of Milton Friedman

Monetary Policy
Scott Sumner
Last month I attended a conference on Milton Friedman, in Austin, Texas. The final session discussed his legacy, and I thought I'd share a few of my remarks. I argued that Friedman and Schwartz's Monetary History of the United States... MORE

During the days of William Jennings Bryan it was pretty well understood that deflationary monetary policies helped bondholders and inflationary monetary policies helped debtors. That's why the rich favored the gold standard and lots of indebted farmers and small merchants... MORE

Krugman slides deeper into old Keynesianism

Monetary Policy
Scott Sumner
Those of us who liked the 1990s vintage Paul Krugman have been able to hold on to a few stands of hope. At least he still supports free trade. At least he only applies the old Keynesian model to the... MORE

There's a lot of discussion about the natural rate of unemployment. Some think we are already close to the natural rate. Others think the labor market is much weaker than the official 6.6% figure would suggest. Evan Soltas has what... MORE

NGDP targeting is not a "fragile" policy

Monetary Policy
Scott Sumner
This post tries to tie together some diverse observations about the sticky wage/NGDP shock model. The motivation for this (unfortunately long) post was the observation that many non-economists seem to find the sticky wage/NGDP shock model to be appealing. I... MORE

Is Abenomics working?

Macroeconomics
Scott Sumner
Tyler Cowen recently linked to an interesting post by Edward Hugh. Hugh argues that much of the recent uptick in Japanese inflation is due to the recent depreciation of the yen. That may be true in an accounting sense, but... MORE

Williamson pulls rank on Yglesias

Monetary Policy
Scott Sumner
I've often argued that the Fed made a mistake holding rates at 2% at their meeting of September 16, 2008 (right after Lehman failed.) Matt Yglesias has a new piece that is also critical of this decision, and Steve Williamson... MORE

Was Mishkin the Benjamin Strong of 2008?

Monetary Policy
Scott Sumner
Benjamin Strong headed the Fed during the Roaring 20s, and used countercyclical monetary policy to try to stabilize prices and output (which is roughly equivalent to NGDP targeting.) He died in 1928 and the new leaders of the Fed switched... MORE

The Keynesian information bubble

International Macroeconomics: Exchange Rates, International Debt, etc.
Scott Sumner
Paul Krugman likes to brag that he doesn't read conservative bloggers, as they have nothing useful to say. And certainly the world is full of conservatives making sloppy arguments. But the downside of that strategy is that when he makes... MORE

The 2008 transcripts: The real issues

Monetary Policy
Scott Sumner
The Fed releases the detailed minutes of its meetings with a 5 year lag. Bloggers that follow monetary policy closely have been eagerly awaiting the 2008 minutes, expecting all sorts of revealing (and perhaps embarrassing) quotes. Although I haven't yet... MORE

Bastiat just rolled over in his grave

Fiscal Policy
Scott Sumner
The Administration has released a report defending the ARRA program, and it's every bit as embarrassing as you might expect. Where to begin . . . 1. The report seems to ignore the fact that fiscal stimulus failed to produce... MORE

But now we know the actual problem was tight money, which caused NGDP to fall in half. Here's Noah Smith: This seems to be the overwhelming consensus in academic macro these days. It seems obvious to most people that the... MORE

Questions that have no answer

Monetary Policy
Scott Sumner
There are some questions that have no answers. One example is the question: "Was monetary policy too expansionary during the housing boom?" The only sensible answer is "it depends." It's not clear what the Fed was trying to do during... MORE

Here's an imaginary dialogue: Student: So the central bank sets the level of interest rates, right? Professor: Not really. It would be more accurate to say that interest rates mostly reflect the condition of the economy. Higher inflation and/or higher... MORE

Here's Paul Krugman suggesting that the ECB has been in a liquidity trap for years: And yes, Europe is very much in a trap. Inflation is falling because the economy is weak, and the economy is being weakened in part... MORE

Where the Stress Falls

Monetary Policy
Scott Sumner
Marcus Nunes has a highly critical post contrasting Paul Krugman's views on Argentina in 2012 and today. I won't be quite as critical. As is often the case with Krugman it's almost impossible to figure out what he is "really... MORE

Keynesian confirmation bias

Monetary Policy
Scott Sumner
When you read Keynesian blogs you get the impression that Keynesians think their model has been somehow confirmed by the events of the last few years. And yet figuring out what their model actually predicts can be maddeningly difficult, like... MORE

NGDP isn't "the economy"

Central Planning vs. Local Knowledge
Scott Sumner
Which of the following three concepts is the outlier, i.e. very different from the other two? 1. Real GDP 2. Nominal GDP 3. The $/pound exchange rate ($ price of pounds = E) I'd guess most econ students would say... MORE

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... MORE

Why are Keynesians so far-sighted?

Economic History
Scott Sumner
I recently did a post pointing out that higher interest rates don't reduce AD.  Indeed even higher interest rates caused by a decrease in the money supply don't reduce AD. Rather the higher rates raise velocity, but that effect is... MORE

Market monetarism in 2013

Monetary Policy
Scott Sumner
Yes, it's been a very good year. Of course what's been getting all the attention is that the year began with our opponents saying that 2013 would be the test of market monetarism. Then when we passed with flying... MORE

Here's Larry Summers: Last month I argued that the U.S. and global economies may be in a period of secular stagnation; in which sluggish growth and output, and employment levels well below potential, might coincide for some time to come... MORE

In a recent post I discussed how Keynesians like Mike Konczal began the year claiming that we were going to have a test of market monetarism, and specifically the doctrine of "monetary offset."  [As recently as 2007, monetary offset (roughly zero fiscal... MORE

Keynesianism: It's not just resting

Macroeconomics
Scott Sumner
During late 2012, market monetarists like myself argued that fiscal austerity in 2013 would not slow growth.  We based that on an idea that was relatively uncontroversial as late as 2007 (even among New Keynesians)---monetary offset.  If the central bank... MORE

Selgin's Thermostat Analogy

Monetary Policy
David Henderson
Once, while a good friend was visiting me on a particularly cold winter's night, the temperature in the poorly uninsulated living room of my old Victorian house dropped to a distinctly chilly 62 degrees. "Can't you make it any warmer?"... MORE

Did the Federal Spending Cuts Slow Growth

Macroeconomics
David Henderson
One of Scott Sumner's most important posts in the last few months is his November 8 post, "Mike Konczal: "We rarely get to see a major, nationwide economic experiment at work." Scott quotes blogger Mike Konzcal from last April: We... MORE

Switching the printing press on

Monetary Policy
Alberto Mingardi
"Inflation is a disease, a dangerous disease for a society, it is sometimes a fatal disease for a society." This short video by Milton Friedman, dating back to the early 80s, is still well worth seeing. With his unsurpassed clarity,... MORE

Krugman on Interest Rates

Monetary Policy
David Henderson
Paul Krugman once bragged--I can't find the link off-hand--that he doesn't read much of what libertarians and conservatives write on economics, but he really knows their views well anyway. I wonder. Earlier this month, Jeff Hummel wrote one of the... MORE

There is no denying that central banks have some impact on interest rates, in both the short and the long run. But the complexity of and qualifications to that impact have been swept into a memory hole, submerging a host... MORE

Japan Bet Bleg

Economic Methods
Bryan Caplan
Scott Sumner has kindly agreed to bleg my request to help craft a bet with Bill Dickens:Bill Dickens wants to bet me that looser Japanese monetary policy won't boost Japanese NGDP.  What victory conditions should a market monetarist consider prudent... MORE

Selgin on Gorton

Monetary Policy
David Henderson
One of the best writers in economics, and one of the very best thinkers in monetary economics, is University of Georgia economist George Selgin. I highly recommend his recent critical review of Gary Gorton's recent book, Misunderstanding Financial Crises. After... MORE

I am always proud to claim vindication by bet.  But I am extremely reluctant to claim vindication by events.  Few things are easier than (a) making vague claims, (b) waiting for something or other to happen, then (c) crowing about... MORE

Robert Murphy on Bitcoin

Money
David Henderson
Bitcoin is an ingenious concept that challenges the way economists have traditionally thought about money. Its inbuilt scarcity provides an assurance of purchasing power arguably safer than any other system yet conceived. Critics argue that because of its lack of... MORE

Solow on Friedman

Fiscal Policy
David Henderson
I promised recently that I would post on Robert Solow's views on Friedman once I had got over the shock. I am now over the shock. Because Solow's piece is quite brief, I won't try to summarize it here. Instead,... MORE

The Hulk's Handshakes and Optimal Monetary Policy

Public Choice Theory
Garett Jones
The world's a complex place and we don't know a lot about how it works. To make matters worse, it's not just that we're ignorant about the world, we're ignorant about ourselves: We rarely know our own strength. Given our... MORE

Budget Cuts Seem to Work

Fiscal Policy
David Henderson
Washington Post blogger Mike Konzcal writes that we now have a test of monetary vs. fiscal policy. According to him, fiscal policy won. That is, fiscal policy is more potent and monetary policy is impotent. In fact the very data... MORE

Since 2008 U.S. banks have been able to earn interest on their reserves: This pins down a minimum interest rate that banks can earn: They never lend for less than that amount. For decades longer, U.S. banks have been able... MORE

Garett Jones argues that the growth rate of the money supply is a target--and targets are often hard to hit, while short-term interest rates are an instrument. He writes: This is known as the "instruments versus targets" distinction in macroeconomics,... MORE

Want to know how to win a gold medal in Rio in 2016? Here's a guaranteed plan to reach the top spot on the podium: 1. Qualify for an Olympic event. 2. Do better than every other competitor. That's it!... MORE

David Stockman Screeches

Monetary Policy
David Henderson
David Stockman, Reagan's first director of the Office of Management and Budget, has a strange op/ed in today's New York Times and "Angus" (aka Kevin B. Grier) does a nice take-apart. I don't agree with all of his criticisms, but... MORE

Hummel on Bernanke's New Central Planning

Monetary Policy
David Henderson
The first two lectures cover the origins and history of the Fed. Mr. Bernanke identifies three primary functions of central banks: to conduct monetary policy (i.e., controlling of the supply of money by setting interest rates); to serve as lenders... MORE

The Hoover/Mellon Tax on Checks

Money
David Henderson
It's heartening to see that virtually everyone who has blogged on the proposed tax on bank accounts in Cyprus has pointed out that this is a set-up for a run on Cyprus banks. I have little to add to that... MORE

Hummel on Fed's Billion-Dollar Losses

Monetary Policy
David Henderson
The last temptation is the greatest treason: To do the right deed for the wrong reason. --T.S. Eliot, "Murder in the Cathedral" I was reminded of this quote when reading an e-mail Jeff Hummel sent to a few of his... MORE

Assorted Tweets

Monetary Policy
Garett Jones
1.  "OK, who thinks sequestration would cause the Fed to boost QE?"If you're raising your hand, then you think the zero nominal bound on interest rates isn't a zero nominal bound on looser monetary policy.  And you think that the... MORE

Alan S. Blinder is one of America's leading economists. One of the few economists who write really well, he is also a master storyteller. In "After the Music Stopped," Mr. Blinder, previously a vice chairman of the Federal Reserve Board... MORE

Hail Bob Murphy

Economic Methods
Bryan Caplan
My inflation bet with Bob Murphy, unlike David's, doesn't mature until January 1, 2016.  David as usual is a model of gentlemanly conduct, but other observers are cackling with glee at Bob's defeat.  This is frankly deplorable.  Bob deserves far... MORE

My Inflation Bet with Bob Murphy

Monetary Policy
David Henderson
I was going to wait until I officially won my inflation bet with Bob Murphy before announcing it here, but because Brad DeLong and Paul Krugman, each in his own special style, have already announced my win, I'll address it... MORE

Nominations for Top Economic Stories of 2012

Energy, Environment, Resources
Garett Jones
Here are three, all good news, more possible:1.  QE3, all hail Scott Sumner.  The ECB's unconventional easings to banks and sovereigns deserve mention as well.  Perhaps someone will make a lot of money betting on high average inflation in the... MORE

Does money influence research outcomes?  We're used to hearing this question when it comes to pharmaceutical research and the same question is surely relevant to research in monetary economics.  Central banks like the Fed, the ECB, and the BoE do... MORE

Bloomberg's Moshinsky and Brunsden report: The shadow banking industry has grown to about $67 trillion, $6 trillion bigger than previously thought...The [Financial Stability Board, FSB], a global financial policy group comprised of regulators and central bankers, found that shadow banking grew... MORE

Supermajority Rule: Buchanan, Tullock, Bernanke

Public Choice Theory
Garett Jones
Most supporters of democracy embrace the ideal of majority rule.  The great Swedish economist Knut Wicksell started from a different ideal: Unanimity.  If your idea is so great, shouldn't we all agree to it? And even if it's only a... MORE

Woolsey and Sumner on QE3

Monetary Policy
David Henderson
The best piece I've seen on QE3 so far is by Bill Woolsey. Even though it's long, there aren't many wasted words. So the whole thing is worth reading. I do want to highlight one important point he makes. Woolsey... MORE

Future money and today's NGDP

Monetary Policy
Garett Jones
In times of trouble, I often turn for comfort to the Cagan money demand model.  Philip Cagan, who passed away in June of this year, was a monetarist who moved the ball down the court.  Back in the 50's, he... MORE

Garett Jones on Krugman

Fiscal Policy
David Henderson
I don't know Garett Jones personally nearly as well as co-blogger Bryan does, but I know his work enough that I also recommended him highly as a guest blogger. Rather than discuss his work generally, I want to highlight his... MORE

Fed Forecasting Errors

Macroeconomics
Arnold Kling
Evan Soltas writes, A disparaging but not unfair comparison would be to little orphan Annie. "The sun'll come out tomorrow," Annie sang. "Bet your bottom dollar that tomorrow there'll be sun." The 3-to-4 percent recovery growth we've been long promising... MORE

John Taylor vs. Ryan Avent

Monetary Policy
Arnold Kling
Taylor writes, The Fed has effectively replaced large segments of the market with itself--it bought 77% of new federal debt in 2011. By doing so, it creates great uncertainty about the impact of its actions on inflation, the dollar and... MORE

Steve Chapman Publicizes My Bet

Monetary Policy
David Henderson
In his column in the Chicago Tribune today, Steve Chapman publicizes my inflation bet with Bob Murphy: Inflation hawks have been predicting a severe outbreak for years. But David Henderson, an economist at Stanford University's Hoover Institution and the Naval... MORE

Awaiting Comments from Scott Sumner

Monetary Policy
Arnold Kling
Two papers on Milton Friedman's monetarism (both in the same pdf), one from Jerry Jordan and one from Allan Meltzer. They come from a 2010 symposium sponsored by the LIberty Fund and the Pacific Research Institute, and they are reproduced... MORE

Morning Roundup

Monetary Policy
David Henderson
There are too many interesting things to write about at length this morning and so I'll just say a little about three. EU Dispersion: Check out this graphic of hypothetical monetary unions to see how incredibly diverse are the members... MORE

Paul vs. Paul

Monetary Policy
David Henderson
If you had asked me how I would have expected Ron Paul to do in debating Paul Krugman, I would have said that Krugman would score a TKO. He would rack up points in each round and dominate. This isn't... MORE

What I'm Reading

Books: Reviews and Suggested Readings
Arnold Kling
The Kindle sample for Robert Hetzel's The Great Recession. I will probably buy the book, but its exorbitant price strikes me as profoundly unfair. If you are interested in the book, then I recommend my Million Mutinies series (continues here... MORE

Bernanke: Turning Japanese

Monetary Policy
David Henderson
So Bernanke responds that he is being consistent because in Japan there was deflation whereas currently there is none. But as Ryan Avent notes, his research on Japan was about more than deflation--it was about a shortage of aggregate demand.... MORE

Monetary Policy: Giving vs. Buying Redux

Monetary Policy
David Henderson
The Fed doesn't expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks (whether by overpaying them for their financial assets or by lending to them on... MORE

Model Forecasting Performance

Macroeconomics
Arnold Kling
Mark Thoma has the story, from Volker Wieland and Maik Wolters. Basically, the forecasts made in the latter part of 2008 failed to anticipate the severity of the recession. Here are some implications that come to mind: 1. The mainstream... MORE

Political Economy of the Zero Bound?

Politics and Economics
Arnold Kling
Tyler Cowen offers a theory. The greater the number of protected service sector jobs in an economy, the more likely those citizens will oppose inflation. Inflation brings the potential to lower real wages, possibly for good. The wages that are... MORE

DeLong and Summers

Macroeconomics
Arnold Kling
I outsource my comments to Scott Sumner. So let's start over. The Fed is unwilling to provide enough monetary stimulus. OK, now what is the point of this paper? Is this to train our future econ PhD students? Are we... MORE

George Selgin on "The Bernank"

Monetary Policy
David Henderson
George Selgin has an excellent commentary on Ben Bernanke's maiden lecture on monetary policy at George Washington University. Not only does George dispel myths that most people believe, but also he dispels myths that I believed. An incomplete list of... MORE

The Authority of Ben Bernanke

Political Economy
Arnold Kling
In The Atlantic, Roger Lowenstein makes the case for bowing to the authority of Ben Bernanke. This a cover story, and the cover photo of Bernanke makes him look like a serene, benevolent emperor. There is no substantive argument to... MORE

Sumner on the Mystery of Bernanke

Monetary Policy
Bryan Caplan
Scott Sumner is the latest intellectual detective on the Bernanke case.  The crucial clue is a 2003 piece by Bernanke himself, which states:Ultimately, it appears, one can check to see if an economy has a stable monetary background only by... MORE

What Bernanke Needed

Politics and Economics
Bryan Caplan
On Matt Yglesias' reading of "Ben Bernanke and the Zero Bound," Laurence Ball is saying that Bernanke needed to be more of a jerk:Former Treasury Secretary and former National Economic Council director Lawrence Summers has always suffered in the eyes... MORE

The Mystery of Bernanke Solved

Behavioral Economics and Rationality
Bryan Caplan
Ben Bernanke was my teacher, and a major influence on my macroeconomic thinking.  When he became Fed chairman, I expected the best of him.  I was sorely disappointed.  His behavior as Fed chairman seemed utterly disconnected from his lectures and... MORE

No Scott, the future is Portugal

Fiscal Policy
Arnold Kling
Scott Sumner writes, In my view, Japan is the future of the global economy. Not the deflation (I think the Fed will be able to keep inflation close to 2%) but the low real interest rates. In retrospect the 2001... MORE

Taylor Rules

Books: Reviews and Suggested Readings
Arnold Kling
John Taylor's First Principles argues for (p.18): predictable policy framework rule of law strong incentives reliance on markets clearly limited role for government On p. 25, he points out that a policy can follow one principle but violate others. An... MORE

Mainstream Views of the Gold Standard

Monetary Policy
Arnold Kling
The IGM economists are unanimously against a gold standard. One of the arguments is that the relative price of gold is too volatile. That strikes me as the wrong argument to make. For one thing, if you had a gold... MORE

We are All Sumnerians Now?

Monetary Policy
Arnold Kling
A great sentence: But I'm not sure Ben Bernanke, Tim Geithner, and the others were in fact making any major mistakes in 2006 beyond underestimating how inept they would be in the fall of 2008 and the winter of 2008-9.... MORE

Mark's Monetary Matters

Monetary Policy
Arnold Kling
Mark Thoma has many interesting links today, in part because the American Economic Association meetings have generated coverage in the media and in the blogosphere. For example, we have Ryan Avent paraphrasing Robert Hall: (i) A little more inflation would... MORE

Robert Hetzel on the Liquidity Trap

Macroeconomics
Arnold Kling
He speaks for me when he writes, The institutional fact that makes a liquidity trap an irrelevant academic construct is the unlimited ability of the central bank to create money. One can make this point in an irrefutable manner by... MORE

John Cochrane's Talk at Hoover: His Version

Macroeconomics
David Henderson
On Tuesday, I posted my notes from John Cochrane's December 3 talk at Hoover. When he saw my notes, John sent me his talk and gave me permission to reprint it. Here it is. Comments at "Restoring Robust Economic Growth... MORE

The Fed's Secret Handout

Monetary Policy
David Henderson
Remember when Ron Paul was almost the only politician in Washington calling for auditing the Fed? After this latest revelation, one can see what good sense he had in doing so. Co-blogger Arnold Kling has already highlighted this, but it... MORE

Mankiw: We Need Fiscal Hawks, Monetary Doves

Macroeconomics
Arnold Kling
He writes, If I understand the news coming out of Europe correctly, the new head of the European Central Bank is offering a simple deal: If fiscal policy becomes hawkish, monetary policy will be dovish. In other words, as government... MORE

A Surprise OWSer

Monetary Policy
Arnold Kling
I write, Are the Fed's actions in the interest of the 99 percent of us who do not own many shares of European banks? Overall, my comments stressed style over substance. This was for the NYT Room for Debate feature.... MORE

Bill Keller's Slip

Monetary Policy
David Henderson
In an editorial in yesterday's New York Times, Bill Keller decries the competition that newspapers get from independent sources on the web. That's not how he poses it, of course. No. What he sees is a lot of loud, outlandish... MORE

Dinner with Tim Congdon

Politics and Economics
Arnold Kling
The other night, RealClearPolitics hosted a dinner with Tim Congdon, the author of Money in a Free Society. Congdon is a British disciple of Milton Friedman. Scott Sumner knows who he is, but not vice-versa. Unlike Sumner, Congdon uses a... MORE

The Crack Theory of Inflation

Monetary Policy
Arnold Kling
NPR lets John Taylor make the case against easier money and higher inflation. He says encouraging inflation is a slippery slope. A central bank may just want to raise inflation moderately, but he says, it inevitably gets translated into higher... MORE

What Got Us Out of the Great Depression?

Monetary Policy
David Henderson
UCLA vs. UCLA UCLA economics professor Lee Ohanian and co-author Harold Cole of the University of Pennsylvania had a piece in the Wall Street Journal this week, "Stimulus and the Great Depression: The Untold Story." There's a lot of good... MORE

From National Affairs

Monetary Policy
Arnold Kling
The current issue (fall 2011) looks quite interesting. Some of the pieces you can now access on line: 1. On means testing for entitlements, Andrew Biggs writes, There is an alternative approach -- one that achieves many of the ends... MORE

Basel III's Deadly Cocktail

Finance
David Henderson
The global sovereign debt crises, and the Greek fiscal crisis, are bad enough on their own. Basel III is just making things worse. If I may summarize past comments, under the purview of Basel III banks in the United States... MORE

Monetary Contraction Update

Monetary Policy
Arnold Kling
The WSJ blog writes, Since the start of September, the greenback is up 19% against the Brazilian real, 18% against the South African rand and nearly 9% against the Korean won. It's up more than 7.5% against the Indian rupee.... MORE

My Thoughts on Monetary Policy

Monetary Policy
Arnold Kling
1. If you believe that aggregate demand matters, then monetary policy is too tight. 2. We won't know whether or not to believe that aggregate demand matters until we see higher inflation. If we see 3 percent inflation or more... MORE

A Lesson in Mainstream Macro

Macroeconomics
Arnold Kling
From Narayana Kocherlakota, The impact of any macroeconomic shock can be divided into two components. One component is the effect of the natural demand and supply adjustments that would occur if prices and their expectations were to adjust continuously. Monetary... MORE

Don't miss Tyler Cowen's excellent post on the size versus the length of fiscal stimulus.  Key passages:For all the talk of a "large stimulus," you don't hear much about a "longer stimulus."... Ideally a stimulus employs some idle labor, stops... MORE

The Monetary Policy Debate

Monetary Policy
Arnold Kling
David Leonhardt is insightful. you would also find a sizable group of economists who thought the Fed could and should do far more than it was doing. This group, known as doves, tilts liberal, though it includes conservatives as well.... MORE

Me on Willis Report Today

Monetary Policy
David Henderson
I'll be on the Willis Report on Fox Business Channel today to give my thoughts on this morning's speech by the "The Bernank." Or should we call him "Central Bank Bernank?" I'll probably discover my inner Scott Sumner as well... MORE

Clive Crook on Monetary Policy

Monetary Policy
Arnold Kling
He writes, The past few weeks have settled, to my satisfaction at least, a long-running debate on this very topic. Rather than targeting inflation, central banks should keep nominal incomes growing on a pre-announced path: say 5 per cent a... MORE

Real and Nominal Bond Yields

Monetary Policy
Arnold Kling
A reader emails, I think you'll be surprised when you pull up the 10yr real yield vs inflation expectations. Virtually the entire move in bond yields has come at the expense of the real yield component. 10yr real yield is... MORE

Kipper- Und Wipperzeit Update, August 9

Finance: stocks, options, etc.
Arnold Kling
Livio Di Matteo writes In essence, resolving the crisis in confidence needs the current ad hoc approach to be replaced with the structure of a more formal mechanism that will generate the confidence in the world financial system needed to... MORE

Timothy B. Lee's Blunder

Monetary Policy
David Henderson
With the lonely exception of Scott Sumner, virtually every libertarian or conservative who has expressed a strong opinion about monetary policy has come down on the side of the inflation hawks. This is from Timothy B. Lee, "Why Are Libertarians... MORE

Sumner on the Big Macro Debate

Monetary Policy
David Henderson
Lots of brilliant people talking past each other. Lacking a common language for communication. Welcome to elite macroeconomics, circa 2011. The right doesn't think we need more NGDP [Nominal Gross Domestic Product] and the left doesn't understand that the Fed... MORE

Ellen Brown on Why Banks Aren't Lending (Much)

Monetary Policy
David Henderson
In an effort to salvage a comatose credit market after the Lehman collapse, the Fed set the target rate for Fed funds - the funds that banks borrow from each other - at an extremely low 0.25 percent. Paying interest... MORE

Scott Sumner Asks a Question

Monetary Policy
Arnold Kling
Scott Sumner asks, So why does the banking crisis in 2008 cause low NGDP in 2011? Possible answers: 1. Because Reinhart and Rogoff say that financial crises cause pain for a long time. They don't have an explanatory model, but... MORE

Richard Shelby, New Keynesian

Monetary Policy
Arnold Kling
According to the WSJ's Andrew Ackerman, The top Republican on the Senate Banking Committee said Thursday he would urge the Federal Reserve to pursue an explicit inflation target, in the face of renewed interest in the idea. This is exactly... MORE

Chapman on Inflation

Macroeconomics
David Henderson
One thing I've always liked about Chicago Tribune columnist Steve Chapman's writing is its high degree of sophistication in economics relative to the usual in regional and even national newspapers. Exhibit A is his column today on inflation. He brings... MORE

The Fed: A Cost-Benefit Reckoning

Monetary Policy
Bryan Caplan
Steve Miller and I have a question on the latest Kauffman econ bloggers' survey.  Namely:Taking into account its entire history, do you think the Federal Reserve has done more harm than good?Survey says:All things considered, this is an amazingly anti-Fed... MORE

Debating Monetarism

Macroeconomics
Arnold Kling
Matt Rognlie takes on the monetarists. Note that the comments on the post, including Matt's comments, are where the debate gets elucidated.... MORE

Are High Food Prices Due to the Fed?

Monetary Policy
David Henderson
On Judge Napolitano's "Freedom Watch" on March 25, Austrian economist Bob Murphy claimed that the unrest in the Middle East was due to rising food prices which in turn are due to the Fed printing money. I'm not sure about... MORE

Gene Smiley on the Great Depression

Macroeconomics
David Henderson
One of the commenters, mark, on Arnold's post today on the Great Depression noted that Gene Smiley has a book out on it. The book is excellent. I asked Gene to put in a few thousand words the highlights of... MORE

The purpose of this exercise is to test my understanding of Sumner's view of monetary theory and policy. I will do this by putting words in the mouths of Sumner and Taylor. It will be a long post, so it... MORE

Hummel on Fed Accounting

Monetary Policy
David Henderson
Jeff Hummel has posted a careful analysis of the Federal Reserve's recent change in accounting rules. His bottom line is that basically the change is no big deal. Although Jeff makes the case very carefully, as is his wont, it... MORE

Two Basic Macro Questions

Macroeconomics
Arnold Kling
1. Does the Fed matter? Vincent and Carmen Reinhart write, First, spending and pricing decisions are assumed to be based on long-term assessments of real income and real rates of return. Second, changes in monetary policy can only change real... MORE

Ron Paul's First Hearing

Monetary Policy
David Henderson
Congressman Ron Paul, a man I admire a great deal, held his first hearing on February 9. I posted on one aspect of it here. I was surprised at his choice of one of witnesses, Tom DiLorenzo. Although I defended... MORE

Bet on Inflation

Monetary Policy
David Henderson
Two days ago, I bet a former student of mine, Thomas Strenge, on the inflation rate for the next year. He's betting that the CPI-U between December 2010 and December 2011 (reported January 14, 2011 and January whatever, 2012) will... MORE

Money Substitutes and Velocity

Monetary Policy
Arnold Kling
David Beckworth writes, referring to 1960-1979, The Fed's performance in stabilizing the growth of nominal spending was abysmal Really, read Beckworth's post. The graphs are more important than the text. My comments will be in Q&A format. The issue is... MORE

Nominal GDP Targeting

Monetary Policy
Arnold Kling
Because of a cold, i will be missing an invitation-only event featuring Scott Sumner. In the spirit of sharing my ideas without my germs, let me offer some thoughts on nominal GDP targeting. 1. For the Fed, a target represents... MORE

An Indispensable Book

Money
Arnold Kling
I've read through Perry Mehrling's The New Lombard Street, and I need to read it again. Meanwhile, some thoughts. 1. Mehrling is an outstanding and engaging intellectual historian, but he fails to appreciate financial crisis porn. I'll explain below. 2.Tyler... MORE

Scott Sumner on NGDP Targeting

Monetary Policy
Arnold Kling
He makes his case in National Review.* In 2009, the U.S. saw the biggest fall in nominal GDP (NGDP) since 1938. It is thus no surprise that we had a debt crisis: Borrowers almost always have trouble repaying debts when... MORE

Has the Word "Conspiracy" Lost Its Meaning?

Monetary Policy
David Henderson
In an excellent analytic post on Frederic Mishkin's money textbook, Scott Sumner wonders about Mishkin's motives in giving an incorrect Aggregate Demand curve and in dropping a question that had been in the previous edition about the effect of the... MORE

Woolsey's Counter Rant

Monetary Policy
Bryan Caplan
Bill Woolsey's comment on Arnold's rant against monetarism deserves more attention.  Highlight:Kling: Your argument doesn't apply to a world of scarcity. There is huge variety of products, all of which are currently being produced, of which additional quantities could be... MORE

Tools and Objectives

Monetary Policy
David Henderson
Let's say I notice that a screw is loose on a handle of a pot. This often happens with one particular old pot we have that we love. So I go get a Phillips screwdriver and tighten the screw. Would... MORE

Austrians and hard-core libertarians usually jointly dismiss monetary and fiscal policy.  But among more moderate economists, there's a long-standing tendency for pro-market views to correlate with a preference for monetary over fiscal policy.  Friedman and Samuelson are the classic examples:... MORE

What I Learned From the Crisis

Monetary Policy
Bryan Caplan
At yesterday's lunch, Tyler asked us to name the most important lesson we learned from the crisis of 2008.  My answer: The Fed is much worse than I thought.  I used to think we could trust an economist of Bernanke's... MORE

Monetary Policy: Giving and Buying

Monetary Policy
David Henderson
In discussions of monetary policy, I've noticed that some discussants fail to note the distinction between giving and buying. A young colleague asked me recently: If you're trying to use monetary policy to increase aggregate demand, isn't it better to... MORE

The Sumnerian Missionary

Monetary Policy
Bryan Caplan
Scott Sumner's written an impressive open letter to conservatives on quantitative easing.  The conclusion is particularly good:I don't think conservatives realized it at the time, but I (and a few other quasi-monetarists) had the strongest argument against fiscal stimulus in late... MORE

Speaking of the Fed...

Economic History
Arnold Kling
George Selgin, William D. Lastrapes, and Lawrence H. White have a long paper comparing economic performance before and after the Fed was created. They make a strong case that performance has not improved. I think this history is well worth... MORE

Bad Argument for the Fed

Monetary Policy
David Henderson
In a recent Slate article critical of returning to the gold standard, Christopher Beam writes: The creation of the Federal Reserve in 1913 didn't stop fiscal crises, of course, but it did a lot to reduce their damage. I'm not... MORE

The Fed's new policies are arguably as important as the election itself.  How can we explain the timing?  There are two main families of hypotheses:Family #1: The election changed the minds of Bernanke and company.Family #2: Bernanke and company made... MORE

What Could Go Wrong?

Monetary Policy
Arnold Kling
Suppose Scott Sumner or his evil twin took over the Fed. The Fed would try to create expectations of returning nominal GDP back to trend relatively soon. These expectations would hit financial markets before they hit goods markets. They will... MORE

Bob Hall on Quantitative Easing

Monetary Policy
Arnold Kling
He was giving a talk on unemployment. Along the way, he said that with quantitative easing, the Fed borrows short and lends long. So the Treasury could do the same thing by issuing less long-term debt and more short-term debt.... MORE

Hummel vs. Bernanke

Monetary Policy
Arnold Kling
Jeffrey Rogers Hummel explains the Bernanke view of financial intermediation but raises a critical question about its policy implications. what distinguishes banks from other financial intermediaries is not merely that deposits are used as money but also that banks, in... MORE

Money, Inflation and Debt

Fiscal Policy
Arnold Kling
An excellent podcast, featuring Jeffrey Rogers Hummel. He argues that there is not enough tax revenue available from seignorage for governments to inflate their way out of their debts. Because of financial innovation and money substitutes, it would take hyperinflation... MORE

Is the Taylor Rule Really a Rule?

Monetary Policy
Arnold Kling
John Taylor writes, The Taylor rule says that the federal funds rate should equal 1.5 times the inflation rate plus .5 times the GDP gap plus 1. Currently the inflation rate is about 1.5 percent and the GDP gap is... MORE

Inflation Regimes Data

Monetary Policy
Bryan Caplan
Want to play with the inflation data to see if some variant of Arnold's inflation regimes theory holds water?  My new RA Zac Gochenour has posted the data right here.  Enjoy, and please share if you discover anything interesting either... MORE

Inflation Regimes? Where?

Monetary Policy
Bryan Caplan
My former student Eli Dourado has ably performed the legwork on my first-cut test of Arnold's inflation regimes theory.  Pay special attention to the last graph, limited to countries with mean inflation below 10%.  There isn't the slightest sign of... MORE

Toggling Without a Switch

Monetary Policy
Bryan Caplan
While I think there's little evidence in favor of Arnold's inflation regimes hypothesis, it strikes me as vastly more likely than Arnold's skepticism about the very ability of central banks to change nominal variables.  Question for Arnold: If you really... MORE

Three Inflation Regimes

Monetary Policy
Arnold Kling
Bryan's question on testing for inflation regimes drew interesting comments. Some notes: 1. The idea that the rate of inflation and its variability are correlated is not original with me. I know the observation was made earlier in the literature,... MORE

She writes, There is no such thing as a perfect Fed; it's always going to err on one side or another. You said you wanted a Fed that didn't err on the loose side; now you have it. This is... MORE

A Nice Sentence

Monetary Policy
Arnold Kling
from Mark Thoma. To me, some of the beliefs held by the other side are astoundingly unbelievable, but they would, of course, say the same thing about me. He then links to a piece by the evil twin of Andy... MORE

AD or AS?

Labor Market
Arnold Kling
Minneapolis FRB President Narayana Kocherlakota says, I mentioned that the relationship between unemployment and job openings was stable from December 2000 through June 2008. Were that stable relationship still in place today, and given the current job opening rate of... MORE

The Leamer Indicators

Macroeconomics
Arnold Kling
Now, I am getting to the part of Macroeconomic Patterns and Stories where Leamer gets very conventional. Economic activity equals spending, monetary policy equals the Fed Funds rate, and all the fiscal and monetary dials work as they do in... MORE

Harry & Teddy and High Inflation

Monetary Policy
David Henderson
A little economics goes a long way This is from Thomas Griffith, Harry and Teddy, a book about the relationship between Henry R. Luce and Theodore H. White, much of which revolved around their passion and thoughts about China under... MORE

What if the Fed Bought Euros?

Monetary Policy
Arnold Kling
Scott Sumner writes, The US can't really use the exchange rate as a policy tool, it is too controversial. And so, we have to turn to less controversial tools, like pouring more wood on what the CBO says is a... MORE

The Vague Fed

Monetary Policy
Arnold Kling
This story says, In the testimony, Sen. Shelby asks Bernanke what everyone wants to know: what more can the Fed do for the economy, if needed. Bernanke replies that the Fed has options from lowering the interest on reserves rate,... MORE

Housing Matters

Macroeconomics
Arnold Kling
Vernon L. Smith and Steven Gjerstad write, In the immediate aftermath of most recessions, housing expands more rapidly than any other component of GDP, and inflation falls. Through the first part of the expansion, housing increases and inflation remains low.... MORE

Hyperinflation

Monetary Policy
David Henderson
One of the most misused terms nowadays, even by economists, is the term "hyperinflation." People have actually referred to the high inflation of the late 1970s as hyperinflation. It wasn't even close. Here's what Michael Salemi wrote in his article... MORE

In response to my criticism, Arnold writes:So my challenge for Bryan (and for the rest of the profession, because I am the one who is out on a limb on this) is to come up with a definition of money... MORE

What is the Fed Thinking, 2?

Monetary Policy
Arnold Kling
Yesterday, I offered two ungenerous interpretations of the Fed's unwillingness to take steps to boost the economy. If the Fed believed in textbook macro, then I would think that, if nothing else, they would stop paying interest on reserves. Today,... MORE

What is the Fed Thinking?

Monetary Policy
Arnold Kling
Read Tyler Cowen, Paul Krugman, Brad DeLong, and Scott Sumner to catch up. Basically, all of them support having the Fed try to undertake expansionary monetary policy, although Krugman thinks it might not work. As you know, I believe in... MORE

Mark Thoma's Response

Monetary Policy
Arnold Kling
I challenged him, and he graciously responds. I am not convinced that lowering the interest rate on reserves from one quarter of a percent to zero will have much of an effect on investment activity. What we need is a... MORE

An Assignment for Mark Thoma

Monetary Policy
Arnold Kling
He claims that there is not much that the Fed can do to contribute to the recovery. I would like for Mark or for Paul Krugman to write an essay on the topic of what would happen if tomorrow the... MORE

Robert Hall Interview

Macroeconomics
Arnold Kling
Mark Thoma points to an interview with Robert Hall, who I consider the Don Sutton of the economics profession.* Read the whole thing. Here are some excerpts from the interview, with my comments. Issuing what appear to be overvalued public... MORE

Russ Roberts on Hayek

Monetary Policy
David Henderson
Russ Roberts has a nice op/ed on Hayek's main ideas in today's Wall Street Journal. He highlights four contributions of Hayek. I agree with all four, but he gave a poor example for one of them. The four are: 1.... MORE

One-Sentence Macro Policy

Monetary Policy
Arnold Kling
Tyler Cowen writes, I believe the "zero bound" is perhaps the single largest "red herring" in the economics profession today. If you understand that sentence, you know everything you need to know about Tyler's case against fiscal stimulus. In case... MORE

John Taylor's Counter-narrative

Finance: stocks, options, etc.
Arnold Kling
He writes, You may not have heard much about the Great Deviation. I define it as the recent period during which macroeconomic policy became more interventionist, less rules-based, and less predictable. It is a period during which policy deviated from... MORE

Why Are Interest Rates Low?

Monetary Policy
Arnold Kling
Raghu Rajan writes, My sense is that we do not know enough about the effect of ultra-low interest rates to state categorically that they are an unmitigated good for reviving the economy. But perhaps the most important cost of low... MORE

M3 Plummeting

Monetary Policy
David Henderson
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. This is from Ambrose Evans-Pritchard in the Telegraph, a British publication. It goes on:... MORE

The Fed and the Euro

Monetary Policy
Bryan Caplan
CNBC says that Ron Paul blames the Fed's loose money for the Euro's troubles.  Umm, doesn't expansionary Fed policy raise the value of the Euro?  Is there any mechanism under which this makes sense?  Or is Paul's view being misstated? ... MORE

Piggy Bank Watch

Monetary Policy
Arnold Kling
James Hamilton writes, Where did the Fed obtain the funds to make all these loans and later buy all this MBS? Mechanically, the Fed implements any of these operations simply by crediting new deposits to the account that the receiving... MORE

No Conspiracy

Monetary Policy
Arnold Kling
In response to David and Bryan, I do not think that Ben Bernanke and other Fed officials are sitting inside their offices plotting to ruin the economy while saving banks. They have convinced themselves (and most pundits) that saving the... MORE

Sumner's spent a year or so trying to figure out what Bernanke's thinking.  Pre-crisis, Scott and Ben were in almost perfect agreement.  But when the crisis hit, Bernanke seemed to suddenly come down with amnesia.  What's up with that?Arnold's solution... MORE

Interpreting Fed Policy

Monetary Policy
Arnold Kling
1. Ricardo Reis writes, With regards to its interest-rate policy, the Federal Reserve has followed the advice from theory by committing to Â…deflation and to keep interest rates at zero for the foreseeable future. It has deviated from the theoretical... MORE

Various

Cross-country Comparisons
Arnold Kling
John Taylor is interviewed. I recommend clicking on "interview transcript," since it is faster to skim and read than to watch an interview. At one point, the interviewer poses a question from Scott Sumner on whether the Fed was too... MORE

Kling vs. Sumner, Continued

Macroeconomics
Arnold Kling
Scott Sumner writes, If NGDP falls 8% below trend, then nominal wages must also fall 8% below trend to maintain full employment, regardless of what is happening to real wages. So I think his story of the past year really... MORE

Sumner and Tobin

Macroeconomics
Arnold Kling
Scott Sumner cites James Tobin on the virtues of the Fed targeting nominal GDP. I wish Tobin had lived long enough to have something to say about the role of money in the current financial crisis. As you know I... MORE

Two Scott Sumner Posts

Macroeconomics
Arnold Kling
First I am so used to NGDP targeting be attacked from the right that I forget that it has no supporters on the left. Recall that conservatives usually support inflation or price level targeting, and think that NGDP targeting is... MORE

Belongia and Roberts on the Fed

Monetary Policy
Arnold Kling
Scott Sumner calls it a "must listen." What I like is the part near the end, where Roberts tries to argue that reform of the Fed is unlikely. Our political system demands a "maestro," someone that everyone can look to... MORE

Friedman and Schwartz Speak Truth about Power

Monetary Policy
David Henderson
One of my favorite parts of Milton Friedman's and Anna J. Schwartz's modern classic, A Monetary History of the United States, 1867-1960, is a lengthy footnote on pp. 463-64. It's their explanation of why they think the reported amount of... MORE

From the Vault: My 2006 Piece on Bernanke

Monetary Policy
David Henderson
Every once in a while, someone asks an easy question. Scott Sumner asked one: Are academics allowed to present someone else's paper in a seminar (if we correctly identify the author?) The answer is unequivocally YES. Here's one of my... MORE

Dan's Great Question about Bernanke

Monetary Policy
Bryan Caplan
Dan asks a great question in the comments:Does anyone know if Bernanke has given a defense of his change in perspective? Has anyone even challenged him on the apparent contradiction between his actions as Fed chairman and his academic work?Anyone?... MORE

Scott Sumner asks:If there are any GMU professors reading this, I have a question.  Are academics allowed to present someone else's paper in a seminar (if we correctly identify the author?)I was inclined to say no, but Scott's post on an... MORE

Brad DeLong's Dangerous Modeling

Macroeconomics
Arnold Kling
From a short paper he calls Picking up Nickels: The more speculators ex ante expect bailouts and the more speculators are impressed with their own cleverness, the more hesitant should the central bank be about providing monetary accommodation. The paper... MORE

Joe Salerno on Central Bankers

Monetary Policy
David Henderson
Central bankers are politicians with tenure. This was economist Joe Salerno's response to Stuart Varney's claim that giving Congress more control over the Federal Reserve would put politicians in charge of monetary policy. (It's at about the 4:09 point.) I've... MORE

Double-Digit Inflation Bet with Bob Murphy

Monetary Policy
David Henderson
Like co-blogger Bryan, I am much less pessimistic about inflation than Bob Murphy is. I think inflation will rise, but there's a lot of room between its current level and 10%. Also, I'm less optimistic about inflation long-term than Bryan... MORE

Is Blinder Going Off the Reservation?

Fiscal Policy
David Henderson
Co-blogger Arnold focused earlier this morning on part of Alan Blinder's Wall Street Journal article, "The Case for Optimism on the Economy." Arnold focuses on what he calls "the job assignment problem." Arnold sees the problem as one of people... MORE

The Source of my Anti-Monetarism

Macroeconomics
Arnold Kling
Alex Tabarrok forwards Paul Krugman's citations of the late Paul Samuelson on the ineffectiveness of monetary policy, due to high substitutability between Federal reserve liabilities and other assets. Alex says that Samuelson sounds like me. Clearly, the causality runs from... MORE

Monetary Thought Experiments

Macroeconomics
Arnold Kling
Scott Sumner writes, Why would doubling the supply of currency cause people to hold twice as much currency in real terms? Here is my thought experiment. Suppose that the government retired lots of $10 bills, giving $5 bills in exchange,... MORE

Some Thoughts on Monetarism

Monetary Policy
Arnold Kling
This post is going to be another macroeconomics lecture. I am going to make some technical arguments about money, expectations and spending. But first, a word about policy. There is absolutely no reason that I can come up with not... MORE

I mention Scott Sumner a lot on this blog. Why? Because I see him as sticking up for mainstream macroeconomics. I myself have been pushing a non-mainstream idea, sort of a muddle between Leijonhufvud and Hayek that I call the... MORE

Bernanke Mea Culpa Redux

Monetary Policy
Bryan Caplan
Don Boudreaux's open letter to Ben Bernanke reminds me how badly I overestimated my former teacher's practical wisdom:Dear Mr Bernanke:I had to down an extra mug of coffee this morning to be certain that I read your op-ed in today's... MORE

Economic Models, the Bond Market, and Monetary Policy

Finance: stocks, options, etc.
Arnold Kling
In a comment on this post, Bryan asked whether I should not be betting on treasury-indexed securities. I'll answer that one below the fold. What I have been thinking about is this. 1. In general, I do not think that... MORE

A Sentence to Ponder

Macroeconomics
Arnold Kling
Gap-based theories of inflation were badly discredited in the 1970s. That is James Bullard. Pointer from WSJ real time economics. To the Krugmans and DeLongs of the world, it is intuitively obvious that with unemployment approaching 10 percent we... MORE

More Scott Sumner

Macroeconomics
Arnold Kling
Here. after July 2008 there were many other indicators that money was far too tight. About this time the dollar began rising sharply against the euro; and commodity prices began a sharp decline. Real interest rates rose from less than... MORE

Scott Sumner, on One Foot

Monetary Policy
Arnold Kling
From his own blog I have a very unconventional way of thinking about the monetary transmission mechanism. A monetary shock is essentially a change in the future path of the money supply relative to velocity, in other words, a change... MORE

M as a weighted average

Money
Arnold Kling
How does monetary policy work? Think of it this way: Fiscal policy adds or subtracts government liabilities. Monetary policy swaps government liabilities.... MORE

Money as a Store of Value

Macroeconomics
Arnold Kling
A commenter asks how I reconcile my assertion that money is a store of vaue with my view that macroeconomics should not emphasize the role of money as a store of value. It is only the second view--that money is... MORE

Monetary Theory, Once Again

Macroeconomics
Arnold Kling
Josh Hendrickson and a reader raise interesting questions.... MORE

Whose Macro is Bizarre?

Macroeconomics
Arnold Kling
Thanks to Mark Thoma for keeping the debate going. In a defense of what Paul Krugman would call Dark Age Macroeconomics, David Beckworth unleashes that most medieval of weapons, the dreaded Vector Autoregression. More on that below the fold. Also... MORE

Responses to Two Critics

Macroeconomics
Arnold Kling
I have been making the following claims about macro.... MORE

Sumner on Why Friedman Was Too Klingian

Monetary Policy
Bryan Caplan
Milton Friedman famously argued that "money matters," but he had a caveat: Money matters with long and variable lags.  Over at Cato Unbound, Sumner suggests that even Friedman was far too Klingian:Most economists assume that interest rates or the money... MORE

Read the whole thing. He likes the Recalculation story, which he points out he articulated last December. But he doesn't really buy my bizarre monetary theory. He writes, "I see the Fed as controlling nominal gdp but not always real... MORE

Bizarre Monetary Theory, Once Again

Macroeconomics
Arnold Kling
Bill Woolsey writes, it is not difficult to see that a large shift in the composition of demand would result in larger shifts in resource utilization, higher structural unemployment, and slower growth in the productive capacity of the economy. For... MORE

Elves and Helicopters

Macroeconomics
Arnold Kling
Bryan asks, Could the central bank hit a 20,000% nominal growth target, plus or minus 1000%? No. Certainly not next quarter. Maybe it come close if it aimed for such a target in 2014. Consider two thought-experiments, one involving elves... MORE

10,005% Nominal GDP Growth

Monetary Policy
Bryan Caplan
In response to my criticism, Arnold writes:I do not think that central banks control nominal GDP any more tightly during a hyperinflation than at other times. That is, in normal times, if nominal GDP wants to grow at a 5... MORE

My Bizarre Monetary Theory, Continued

Macroeconomics
Arnold Kling
Before I respond to Bryan's comments, let me first recommend the two Scott Sumner papers that he mentions. This paper develops a theory that cultural values drive economic policy, which in turn drives economic outcomes. It is an interesting complement... MORE

I Deny (the significance of) MV = PY

Macroeconomics
Arnold Kling
Jeffrey Rogers Hummel writes, Orthodox monetarists attributed such shocks to declines in the rate of monetary growth, whereas traditional Keynesians blamed declining autonomous expenditures. Both of these sources are captured in the well known equation of exchange: MV = Py,... MORE

The Fed's Hold on Economists

Monetary Policy
David Henderson
And celebrity is no shield against Fed excommunication. Paul Krugman, in fact, has gotten rough treatment. "I've been blackballed from the Fed summer conference at Jackson Hole, which I used to be a regular at, ever since I criticized him,"... MORE

Friedman vs. Bernanke, II

Monetary Policy
David Henderson
As noted in my previous post on this, Tyler Cowen and I have converged: we agree that Bernanke's and Friedman's views on the causes of the Great Depression differed and that, although there is some ambiguity, there is no clear... MORE

Boo Alan Blinder

Political Economy
Arnold Kling
He writes, an audit of its monetary policies by the GAO -- which, remember, works for Congress -- could easily develop into something quite dangerous. Here is a not-so-unlikely hypothetical: sometime in 2010, the Fed, wanting to avoid inflation, will... MORE

Friedman vs. Bernanke

Monetary Policy
David Henderson
In the back and forth between Tyler Cowen and me, with a lot of heavy hitters commenting, we have actually made progress. I posted the following on August 31: To put it another way, Friedman and Schwartz argued that the... MORE

Paging Scott Sumner

Monetary Policy
Arnold Kling
He needs to clear up some confusion. I think that Penn Bullock, is quite confused about Milton Friedman, monetarism, and the current crisis. In fact, Bullock is so confused that I searched in vain for something to excerpt. On the... MORE

Tyler Cowen, Milton Friedman, and Bailouts

Monetary Policy
David Henderson
In my responses (here and here) to Tyler Cowen's posts (here and here) on whether Milton Friedman would have supported the bailout of banks, I let myself be distracted by Tyler's use of the word "pretend." I accused Tyler of... MORE

Tyler Cowen's Response

Monetary Policy
David Henderson
On this blog a couple of days ago, I challenged Tyler Cowen on two issues. He responded to both in the comments section of my post and on his own blog today. His responses on both are unsatisfactory. Here's why.... MORE

Correction on Krugman

Macroeconomics
David Henderson
On May 18, in discussing Paul Krugman's analogy between a baby-sitting coop and the general economy, I wrote, quoting my Reason review of Krugman's The Return of Depression Economics: But nowhere does Krugman mention that another way to solve a... MORE

Various Links

Monetary Policy
Arnold Kling
I've been away, mostly in Prague (where the big economic question is why so many older buildings have so many fancy details. My answer is that there must have been a very unequal distribution of wealth, so that rich folks... MORE

Scott Sumner vs. Milton Friedman

Macroeconomics
Arnold Kling
Tyler Cowen writes, Professor Sumner's views differ from the monetarism of Milton Friedman by emphasizing expectations rather than any particular measure of the money supply. Allow me to expand on the history of monetary thought embedded in that statement.... MORE

This Should be Good

Monetary Policy
Arnold Kling
A Debate Between Scott Sumner and John Cochrane. Sumner thinks that the Fed can hit a nominal GDP target if it wants to. When I heard Cochrane a while back, he was talking about the high rate of substitutability of... MORE

Auditing the Fed: Reply to Bob Murphy

Monetary Policy
David Henderson
In his comment on my previous post about auditing the Fed, Bob Murphy stated that he shared my concerns about the audit movement because he, like me, distrusts Congress. He criticized my view, though, that the Fed is actually more... MORE

Audit the Fed, or End It?

Book Club
David Henderson
The Congressman I admire most, Ron Paul, is advocating that the Federal Reserve Bank be audited. Is this a good idea? I think there's one obvious plus and there are two less-obvious minuses. The obvious plus is that an organization... MORE

Shorter Scott Sumner

Monetary Policy
Arnold Kling
Bryan points to a Scott Sumner's monetarist credo. Think of it as a simplification of the Taylor rule. The Sumner Rule is, if the consensus forecast of nominal GDP growth is below 5 percent, then loosen up. Presumably, if the... MORE

Why Bernanke Should Be Canned

Monetary Policy
Bryan Caplan
Contrary to my expectations, Bernanke's been a disaster.  At the same time, though, I can't honestly say that his successor will be any better.  Why then do I strongly favor firing my former teacher?  Accountability.  When someone fails as badly... MORE

Krugman's Baby-Sitting Analogy

Macroeconomics
David Henderson
This is another in an open-ended series on strengths and weaknesses in Paul Krugman's writing. In a 1999 review of Krugman's The Return of Depression Economics, I wrote: One of Krugman's strengths is his talent for analogies that help readers... MORE

I just read Bernanke's 2004 piece on "The Great Moderation."  It's written by the wise Bernanke I remember, not the embarassment he's become.   In hindsight it's tempting to treat Bernanke's analysis as pure delusion.  But in the end, I bet... MORE

Bob Lucas's Talk

Fiscal Policy
David Henderson
Bob Lucas's talk at the Council on Foreign Relations is well worth reading. Here are some of the nuggets. After pointing out that the forecasted rate of growth of nominal GDP for 2009 is zero percent, he states: So if... MORE

Response to Susan Lee

Monetary Policy
David Henderson
Economist and economic journalist Susan Lee has written an attack on Alan Greenspan and a review of John Taylor's recent book that is implicitly a response to my defense of Greenspan and review of Taylor's book. You can read both... MORE

My Qualified Defense of Greenspan

Monetary Policy
David Henderson
In today's Wall Street Journal is a round-up of views on whether Alan Greenspan caused the housing boom. The lead piece, by me, says that he didn't, for reasons that will be familiar to regular readers of this blog. My... MORE

Taylor Rules

Finance
David Henderson
My book review of John Taylor's latest book, Getting Off Track, appeared on Forbes.com yesterday. Two excerpts from my review: Throughout 2007 and 2008, Fed Chairman Ben Bernanke and others in policy-making positions assumed that the problem was that the... MORE

Greenspan and CAFE

Monetary Policy
David Henderson
The latest issue of The Freeman: Ideas on Liberty carries two articles written or co-authored by me. The first, "Was Money Really Easy Under Greenspan?," by Jeff Hummel and me, goes after the view that Greenspan conducted a loose monetary... MORE

Mark to Market

Finance
David Henderson
Economist Jeff Hummel sent out the following to a large e-mail list. I'm reprinting the whole thing here and appending my comments. Jeff's e-mail: Mark-to-market accounting has received a lot of criticism during the current financial crisis. But a recent... MORE

Taking Krugman's Side

Monetary Policy
Arnold Kling
Goodness knows, I don't want to. I still think he owes me a correction--and in fact an apology--in his column for putting in quotation marks an inaccurate, misleading, and distorted version of something I said. But here is Tyler Cowen... MORE

Scott Sumner Cries Out

Macroeconomics
Arnold Kling
He wants the Fed to do whatever it can to try to get prices headed up rather than down. His best argument: What do we have to lose?: We can get rid of interest on bank reserves (and consider a... MORE

Save the Economy or Save the Banks?

Monetary Policy
Arnold Kling
Scott Sumner writes, Many economists simply assume that the current contraction has been caused by the financial crisis. After all, isn't that obvious? Actually, no. For nearly a year after the onset of the financial crisis nominal GDP continued growing... MORE

One-Two Punch on Mark-to-Market

Regulation
David Henderson
Today, the Wall Street Journal published two excellent letters on the mark-to-market regs that banks are under. IMO, too little has been written about this by economists. The second letter tells a horror story; the first makes a constructive suggestion... MORE

Canada's Central Bank

Economic History
David Henderson
Yesterday, blogger Megan McArdle had an interesting post on Canada. She wrote: Canada is now being held up as a regulatory example to us, but Canada has always been an odd duck--it was also the only major economy in the... MORE

Hummel on Fed

Monetary Policy
David Henderson
Monetary economist Jeff Hummel has posted today a detailed exposition of recent Fed policy. The two most interesting things to me are: (1) The money supply is increasing. This fact undercuts one part of the "monetary policy is impotent" view... MORE

The Dollar as Anchor

Monetary Policy
David Henderson
Lots of people lately have been talking about how lousy the dollar is as a store of value. I'll repeat the offer I made in a recent book review in Regulation, in response to an economist's claim that government had... MORE

I Believe in Quantitative Easing

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes, Will [purchases of mortgage securities and other assets by the Fed] succeed if we just do it on a sufficiently large scale? I'm not at all convinced that it would. Our standard finance models treat interest rate... MORE

John Taylor: The Fed Done It

Macroeconomics
Arnold Kling
He is a leading macroeconomist, and he is out with a serious paper, in which he blames the Fed for excessively low interest rates from 2002-2004. Pointer from James Hamilton, who does not agree. Hamilton writes, I feel he overstates... MORE

Best Banking: Animal Analogy Ever

Monetary Policy
Bryan Caplan
Arcane banking regulations matter, but it's hard to communicate anything about them to a broader audience.  Alex Tabarrok rises to the occasion with an elegant analogy: When no interest was paid on reserves banks tried to hold as few as... MORE

Our Response to Selgin

Monetary Policy
David Henderson
Early in November, Jeff Hummel and I had a paper published by the Cato Institute in which we defended Alan Greenspan from the critics who claimed that his monetary policy was the primary cause of the current financial crisis. We... MORE

Heretical Thoughts

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes The Fed has been trying to sop up the illiquid assets that nobody else wants. But I think what the Fed should be doing is instead acquiring assets of a type that would allow it to quickly... MORE

Is Zero a Lower Bound for Interest Rates?

Monetary Policy
Arnold Kling
Suppose that the Federal Funds rate falls to zero. Does that mean that we are in the infamous liquidity trap, in which the Fed is powerless to use open market operations to affect the economy? I think not, and I'm... MORE

Was Greenspan's Monetary Policy Too Loose?

Monetary Policy
David Henderson
We are not arguing that Greenspan's policies were perfect. Nor should anything that follows be construed as a defense of central banking or of the Federal Reserve. Particularly alarming is the way the lender-of-last-resort function has been expanding the moral-hazard... MORE

Greenspan, Bernanke, and Bubbles

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong says I am wrong about his views of Greenspan. I now think he was wrong not to move aggressively to curb the housing bubble of the 2000s. But I think all in all he did a very good... MORE

Central Bankers and History

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong writes, The current financial crisis has its roots in Greenspan's decision to keep interest rates very low in 2002 and 2003 to head off the danger of a deflation-induced double-dip recession, and his subsequent decision that the costs... MORE

Work-Safe Readings for Macro

Austrian Economics
Arnold Kling
In response to my post on the porn that is modern macro, readers naturally asked me for alternatives.... MORE

What Samuelson Said About Inflation in the 70s

Monetary Policy
Bryan Caplan
New Keynesian economics has been around for so long that it's hard to remember what Old Keynesian economics was like.  Here are two quotes (via Garett Jones via Robert Hetzel) from Samuelson to remind us of the days when... MORE

How Banking Panics Worked Before the Fed

Monetary Policy
Bryan Caplan
Princeton has re-released Friedman and Schwartz's The Great Contraction. Ben Bernanke's speech in honor of Friedman's 90th birthday is now the book's epilogue. The highlight, for me, is Bernanke explaining how banks dealt with panics before the Fed existed:Before the... MORE

Hummel on Central Banking

Monetary Policy
Bryan Caplan
Hummel follows up on my post on the (relative) efficiency of modern central banks:Here are my three reasons, given somewhat sporadically in my lecture, for the better performance of central banks in developed countries since the 1980s: 1. Highly developed... MORE

Two weeks ago, I relayed the following story:Yesterday at the FEE seminar, I got to hear the excellent Jeff Hummel thoroughly debunk the crazy Rothbardian view that fractional reserve banking is "fraudulent." It was a fun (and funny) lecture, but... MORE

Yesterday at the FEE seminar, I got to hear the excellent Jeff Hummel thoroughly debunk the crazy Rothbardian view that fractional reserve banking is "fraudulent." It was a fun (and funny) lecture, but the target was too easy. So during... MORE

Am I Wrong to Blame the Fed?

Monetary Policy
Bryan Caplan
Arnold agrees with my causal analysis of the dollar and gas prices, but doesn't think I should blame the Fed. Well, let me put it this way: If Bernanke were to publicly say, "Federal Reserve policies are the main cause... MORE

Monetary Theory and Policy

Monetary Policy
Arnold Kling
In today's econtalk podcast, Tyler Cowen and Russ Roberts discuss monetary theory and monetary policy. It is a wide-ranging discussion, covering several weeks worth of an intermediate macro course. If you are not familiar with the subject, you might have... MORE

I just read Murray Rothbard's The Case Against the Fed, and it brought back to mind my youthful exposure to his whole approach to monetary economics. (See here, here, and here for more). My mature view is that there are... MORE

Fed Attribution Error

Monetary Policy
Arnold Kling
John Tamny writes, Gold, the single best market indicator of a currency's true value, hit a high of $740 in the summer of 2006, and its 12 percent fall since then neatly foretold the troubles borrowers and lenders are experiencing... MORE

Kling on Kuttner on Kuttner vs. Friedman

Monetary Policy
Arnold Kling
My latest essay. Kuttner has apparently missed the point of the concept of a natural rate of unemployment, which is that the unemployment rate should not be a "target for monetary policy." What Friedman means by the term natural unemployment... MORE

Bernanke's Nomination Ditto

Monetary Policy
Arnold Kling
I agree with Bryan that Bernanke is an excellent choice. He is knowledgable and articulate--just the other day I referred econlog readers to Bernanke's overview of recent productivity developments. Ben was a year ahead of me in grad school at... MORE

I'm not convinced that mild deflation is anything to worry about. It didn't seem to hold back the U.S. economy during the post Civil War, pre-Fed era. But suppose you were worried about it. What could be done to reverse... MORE

Interest Rate Debate

Monetary Policy
Arnold Kling
Brad DeLong argues, There is a 5m-worker gap between household-survey employment today and what it would be if the employment-to-population ratio were at its average level for 2000. This suggests that we are extraordinarily far from anything that could be... MORE

Reagan's Economics in Context

Supply-side Economics
Arnold Kling
I decided to put my thoughts into a longer essay. When Ronald Reagan defeated Carter's re-election bid, "incomes policies" were a proven failure. Notwithstanding Milton Friedman's comments quoted above, by 1980 it took a lot less courage to stand by... MORE

Bond Market Vigilantes

Monetary Policy
Arnold Kling
If interest rates are the measure of monetary policy, then we have already seen a strong tightening. For example, since late March, the yield on the 10-year Treasury note -- a critical interest rate since it's the basis for mortgage... MORE

Finance and Macroeconomics

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen recommends two articles by Perry Mehrling on the relationship between the theory of finance and monetary theory/macroeconomics. One of the articles is a nice summary of the work of Fischer Black. What Black did was to conceive of... MORE

Lessons of the Great Depression

Macroeconomics
Arnold Kling
In this essay, I summarize what I have been reading about the Great Depression and its implications for today. The Depression certainly was an era of displacement. In fact I have borrowed the very term "displacement" from the late economic... MORE

Various Articles

Regulation and Subsidies
Arnold Kling
Posting here will be infrequent until later in October. Meanwhile, here are some links that may be of interest. Is the insecurity of Microsoft software an externality that should be regulated or taxed? An example of professional licensing as rent-seeking... MORE

Consensus Macroeconomics?

Monetary Policy
Arnold Kling
Milton Friedman describes the consensus in macroeconomics as having moved in his direction. That Keynesian vision was thoroughly discredited by experience in the '70s and '80s. It has since been replaced by what has become known as New Keynesian Economics,... MORE

Many Interest Rates

Monetary Policy
Arnold Kling
Graham Turner claims to offer magical monetary manipulations. A year and a half after the Japanese government introduced its first fiscal stimulus, the yield curve (10-year Japanese government bond yields minus the discount rate) had steepened by nearly 2 percentage... MORE

Common Sense Macroeconomics

Macroeconomics
Arnold Kling
Robert Solow favors common sense over exotic theory. On the concerns about deflation in the U.S., he writes, If you look at the hundreds of prices that are tracked by the Bureau of Labour Statistics as elements of the consumer... MORE

Liquidity Trap, II

Monetary Policy
Arnold Kling
The comments on the Liquidity Trap or Statism Trap thread have been interesting. I want to respond to a couple of issues that were raised. First, D-squared pointed out that Krugman has written about the liquidity trap in Brookings Papers,... MORE

Liquidity Trap or Statism Trap?

Supply-side Economics
Arnold Kling
In this essay, I take issue with Paul Krugman's claim that the liquidity trap is relevant to Japan and the United States. Krugman has learned the wrong lessons. He thinks that the bank bailouts are a good thing, that Japan's... MORE

Deflation-fighting and Depreciation

Macroeconomics
Arnold Kling
Continuing the discussion that began with the thread Liquidity Trapped?, we can add opinions from Richard Berner of Morgan Stanley and Victor Canto of the Cato Institute. Canto writes, The data make a compelling case that we are on the... MORE

Liquidity Trapped?

Macroeconomics
Arnold Kling
The threat of deflation and/or a liquidity trap has been discussed in a number of places recently. Columnist Robert J. Samuelson writes, Global demand remains weak; surplus capacity discourages new investment; gluts depress prices. Deflation could be dangerous: Lower prices... MORE

Optimum Currency Areas

Optimum Currency Areas
Arnold Kling
Martin Feldstein explains why Europe is not an optimum currency area, even though the United States is one. First, American employees move within the country when demand is relatively weak in a particular region, facilitated by a common language and... MORE

Central Bank Timidity

Macroeconomics
Arnold Kling
Morgan Stanley's Steve Roach writes about the timidity of the European Central Bank. Incrementalism doesn’t work in combating deflation. That was one of the key lessons that the research staff of the Federal Reserve drew in a widely noted paper... MORE

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