Matt Nolan

Bernanke is not rejecting Friedman

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A Bloomberg article stated that Bernanke is rejecting Friedman and following Keynes by printing money in the current environment (ht The Big Picture). However, this is far from the case.

Friedman believed that in the short run monetary policy could be used for demand management, but in the long-run undisciplined monetary policy will lead to inflation. The key belief here was that the “velocity of money” changes in the short run but is a constant over the long run. Friedman did not like the idea of using “fiscal policy” to manage demand – which is what Keynes proposed in the general theory.

Now, Bernanke doesn’t control fiscal policy – so I don’t think he is siding with Keynes. Further, Friedman blamed the GD on monetary policy being too contractionary – as even though the stock of money rose, the sharp fall in the velocity of money meant that the money supply contracted.

This is the logic Bernanke is using when introducing “credit easing”. Furthermore, in order to avoid the long run inflation problem he has set it up so a lot of the expansionary monetary policy will unwind (although he has committed to low interest rates in the future in order to keep inflation expectations positive).

As a result, I see his actions as completely consistent with Friedman – and I think the article is misleading.

Matt Nolan

Why more criticism of macro?

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Tim Harford – someone I personally believe is one of the best economists of our time – has come out stating that modern macroeconomics is a failure. (ht Economist’s View – note that commentary in this post is very good, I agree with much of what Mark Thoma is saying except for the belief that the economic model is different between now and “normal” times.  His point on the lack of data to calibrate is very very true).

Now, Tim Harford is one in a list of very smart, non-macro economists who are attacking macroeconomics.  I don’t agree – as I’ve discussed here.

My main concern now is not so much that these incredibly smart people are attacking the discipline – a discipline does its best work when it is being critiqued.  My main concern is the lack of counter-arguments I am seeing from real macroeconomists.  Where are they?  Where is their defence?  I have stated why I think contemporary macro is defendable – but I’m no macroeconomics professor from Harvard.

Until macroeconomists can define the role and scope of their research, and justify their methodology in a way that other disciplines can relate to we are just going to be stuck with arbitrary criticism.  As a result, I think the lack of explicit discussion surrounding methodology is the real issue in macroeconomics …

Matt Nolan

What am I missing on Ricardian equivalence?

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Paul Krugman appears to be saying that a temporary increase in government spending can provide a stimulus EVEN WHEN full Ricardian equivalence holds. All the comments on his blog are saying how simple his explanation is, and how the Chicago school is full of morons – but I don’t really think his argument water tight.

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Matt Nolan

Consumer prices – not asset prices

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Earlier I mentioned a piece by Steven Gjerstand and Vernon Smith that was a bit harsh on monetarism – as it ignored that the monetarist explanation and a economic readjustment explanation could be complements instead of substitutes.

Now Barry Ritholtz points out another interesting point from the piece – their discussion of the fact that house price growth was effectively taken out of the CPI.  The money quote is:

If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%. With nominal interest rates around 6% and inflation around 6%, the real interest rate was near zero, so household borrowing took off.

Let’s discuss.
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Matt Nolan

Why NZ doesn’t have the same need for stimulus

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Chris Worthington from Infometrics has spoken out against a fiscal stimulus in NZ in the current environment.

I agree, as I have said before. Note, I also raised some criticisms of my idea which could be applied here.

Overall, there is a time and a place for special, temporary, fiscal policy (although, even in this special case monetary policy may be superior). However, even now we are not in this special place …

Matt Nolan

Scott Sumner: Insightful analysis

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Seriously, lets all go and read Scott Sumner.  He discusses how monetary policy can still be effective even when the cash rate hits zero, and I find it difficult to fault his reasoning.

I would suggest reading all the posts, but there are a few that touched me:
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