Marcus Nunes has two extremely illustratative graphs in his latest blog post. Just take a look here:
I don’t think any other comments are needed…
Marcus Nunes has two extremely illustratative graphs in his latest blog post. Just take a look here:
I don’t think any other comments are needed…
Posted by Lars Christensen on November 29, 2013
I had an up-ed in today’s edition of the Danish Business daily Børsen. Here is the English translation:
Recently inflation has fallen sharply in most European countries and in some countries we already have deflation, and it is very likely that deflation will spread to several European countries in the near future.
In Sweden inflation has already fallen below zero , as is the case in several southern European countries.
There is certainly reason to fear deflation. In the 1930s deflation was allowed to spiral out of control and the consequences were disastrous. But in this context it is extremely important to remember that there are good and bad deflation.
The overall price level in the economy may fall for two reasons. First, productivity increases may cause prices to fall. As will falling input prices – for example lower oil prices. Second, a general contraction in aggregate demand – for example due to tighter monetary policy – can reduce the price level.
Economists normally call productivity increases and falling oil positive supply shock. They are unilaterally positive as an positive supply shock overall increases prosperity. That’s the good deflation.
Conversely a general decline in prices, which is a result of weak aggregate demand – a negative demand shock – is purely negative as it usually leads to higher unemployment and lower capacity utilization in the economy. That’s the bad deflation.
In general the economic development in Europe in the last five years has been characterized by very weak demand development. It has created clear deflationary trends in several European economies. That certainly has not been good. It has been a bad deflation.
However, the recent decline in European inflation we have seen is primarily a result of falling oil prices – that is a good deflation, which in shouldn’t be a worry. The paradox is that these recent (positive) deflationary trends in the European economy seems to have caused the European Central Bank to wake up and reduce interest rates and it is now being speculated that the ECB will undertake further action to ease monetary policy.
According to the monetary policy textbook central banks should not respond to “good deflation”. This obviously could give reason to question the fact that the ECB is now finally moving to ease monetary policy. But the truth is that the ECB in the past five years have failed to sufficiently aggressively ease monetary policy to to avoid bad deflation.
Therefore, one can rightly say that the ECB is doing the right thing by easing monetary policy, but basically for the wrong reasons. But let’s just be happy that the ECB finally makes the right decision – to ease monetary policy – even if it is not for the right reasons.
The big question is now how the ECB will ease monetary policy when interest rates are already close to zero. But this “problem” is easily solved. A central bank can always ease monetary policy – even when the interest rate is zero. The Federal Reserve and Bank of Japan have solved this problem. They have simply increases the monetary base. The ECB has so far been very reluctant to move in this direction, but the fact that we are now moving toward deflation in the euro zone may also cause the ECB to move forward in this field. Let’s hope so – because if the ECB does not move in this direction we’re going to have ongoing problems with deflation – bad deflation – in Europe very soon.
Today we got more data underlining the fact that the ECB should be seriously worried about bad deflation. Hence, euro zone M3 grew by only 1.4% in October. The Telegraph’s Ambrose Evans-Pritchard has an excellent comment on the horrible M3 numbers:
Eurozone money supply growth plummeted in October and loans to firms contracted at a record rate, heightening the risk of a stalled recovery and Japanese-style deflation next year.
The European Central Bank said M3 money growth fell to 1.4pc from a year earlier, lower than expected and far below the bank’s own 4.5pc target deemed necessary to keep the economy on an even keel.
Monetarists watch the M3 data — covering cash and a broad range of bank accounts — as an early warning signal for the economy a year or so in advance. “This a large dark cloud hanging over the eurozone in 2014; it means the public debt ratios in Southern Europe are at greater risk of exploding,” said Tim Congdon from International Monetary Research.
Ambrose also quotes me:
“The ECB needs to cut rates to zero and launch quantitative easing (QE) to head off deflation, but they are not there yet,” said Lars Christensen from Danske Bank. “The debt problem in Italy will be much worse if they let nominal GDP fall, leading to yet more austerity.”
So yes, we are seeing some good deflation in the euro zone at the moment and we should be happy about, but unfortunately we are likely to see a lot more bad deflation soon if the ECB does not get its act together soon.
Posted by Lars Christensen on November 28, 2013
This week have brought even more confirmation that we are still basically in a deflationary world – particularly in Europe. Hence, inflation numbers for October in a number of European countries published this week confirm that that inflation is declining markedly and that we now very close to outright deflation in a number of countries. Just take the case of the Czech Republic where the so-called monetary policy relevant inflation dropped to 0.1% y/y in October or even worse Sweden where we now have outright deflation – Swedish consumer prices dropped by 0.1% in October compared to a year ago.
And the picture is the same everywhere – even a country like Hungary where inflation notoriously has been above the central bank’s 3% inflation target inflation is now inching dangerously close to zero.
Some might say that there is no reason to worry because the recent drop in inflation is largely driven by supply side factors. I would agree that we shouldn’t really worry about deflation or disinflation if it is driven by a positive supply shocks and central banks would not react to such shocks if they where targeting nominal GDP rather than headline consumer price inflation. In fact I think that we are presently seeing a rather large positive supply shock to the global economy and in that sense the recent drop in inflation is mostly positive. However, the fact is that the underlying trend in European prices is hugely deflationary even if we strip out supply side factors.
Just the fact that euro zone money supply growth have averaged 0-3% in the past five years tells us that there is a fundamental deflationary problem in the euro zone – and in other European countries. The fact is that inflation has been kept up by negative supply shocks in the past five years and in many countries higher indirect taxes have certainly also helped kept consumer price inflation higher than otherwise would have been the case.
So yes supply side factors help drag inflation down across Europe at the moment – however, some of this is due to the effect of earlier negative supply side shocks are “dropping out” of the numbers and because European governments are taking a break from the austerity measures and as a result is no longer increasing indirect taxes to the same extent as in earlier years in the crisis. Hence, what we are no seeing is to a large extent the real inflation picture in Europe and the fact is that Europe to a very large extent is caught in a quasi-deflatonary trap not unlike what we had in Japan for 15 years.
Here comes the Zero Lower Bound
Over the past five years it is not only the ECB that stubbornly has argued that monetary policy was easy, while it in fact was über tight. Other European central banks have failed in a similar manner. I could mention the Polish, the Czech central banks and the Swedish Riksbank. They have all to kept monetary policy too tight – and the result is that in all three countries inflation is now well-below the central bank’s inflation targets. Sweden already is in deflation and deflation might very soon also be the name of the game in the Czech Republic and Poland. It is monetary policy failure my friends!
In the case of Poland and Sweden the central banks have had plenty of room to cut interest rates, but both the Polish central bank and the Swedish Riksbank have been preoccupied with other issues. The Riksbank has been busy talking about macro prudential indicators and the risk of a property market bubble, while the economy has slowed and we now have deflation. In fact the Riksbank has consistently missed its 2% inflation target on the downside for years.
In Poland the central bank for mysteries reasons hiked interest rates in early 2012 and have ever since refused to acknowledged that the Polish economy has been slowing fairly dramatically and that inflation is likely to remain well-below its official 2.5% inflation target. In fact yesterday the Polish central bank published new forecasts for real GDP growth and inflation and the central bank forecasts inflation to stay well-below 2.5% in the next three years and real GDP is forecasted to growth much below potential growth.
If a central bank fails to hit its inflation target blame the central bank and if a central bank forecasts three years of failure to hit the target something is badly wrong. Polish monetary policy remains overly tight according to it own forecasts!
The stubbornly tight monetary stance of the Polish, the Czech and the Swedish central banks over the past couple of years have pushed these countries into a basically deflationary situation. That mean that these central banks now have to ease more than would have been the case had they not preoccupied themselves with property prices, the need for structural reforms and fiscal policy in recent years. However, as interest rates have been cut in all three countries – but too late and too little – we are now inching closer and closer to the Zero Lower Bound on interest rates.
In fact the Czech central bank has been there for some time and the Polish and the Swedish central bank might be there much earlier than policy makers presently realise. If we just get one “normal size” negative shock to the European economy and then the Polish and Swedish will have eventually to cut rates to zero. In fact with Sweden already in deflation one could argue that the Riksbank already should have cut rates to zero.
The Swedish and the Polish central banks are not unique in this sense. Most central banks in the developed world are very close to the ZLB or will get there if we get another negative shock to the global economy. However, most of them seem to be completely unprepared for this. Yes, the Federal Reserve now have a fairly well-defined framework for conducting monetary policy at the Zero Lower Bound, but it is still very imperfect. Bank of Japan is probably closer to having a operational framework at the ZLB. For the rest of the central banks you would have to say that they seem clueless about monetary policy at the Zero Lower Bound. In fact many central bankers seem to think that you cannot ease monetary policy more when you hit the ZLB. We of course know that is not the case, but few central bankers seem to be able to answer how to conduct monetary policy in a zero interest rate environment.
It is mysteries how central banks in apparently civilised and developed countries after five years of crisis have still not figured out how to combat deflation with interest rates at the Zero Lower Bound. It is a mental liquidity trap and it is telling of the serious institutional dysfunctionalities that dominate global central banking that central bankers are so badly prepared for dealing with the present situation.
But it is nonetheless a fact and it is hard not to think that we could be heading for decades of deflation in Europe if something revolutionary does not happen to the way monetary policy is conducted in Europe – not only by the ECB, but also by other central banks in Europe. In that sense the track record of the Swedish Riksbank or the Polish and Czech central banks is not much better than that of the ECB.
We can avoid deflation – it is easy!
Luckily there is a way out of deflation even when interest rates are stuck at zero. Anybody reading the Market Monetarists blogs know this and luckily some central bankers know it as well. BoJ chief Kuroda obviously knows what it takes to take Japan out of deflation and he is working on it. As do Czech central bank chief Miroslav Singer who last week – finally - moved to use the exchange rate as policy instrument and devalued the Czech kurona by introducing a floor on EUR/CZK of 27. By doing this he copied the actions of the Swiss central bank. So there is hope.
Some central bankers do understand that there might be an Zero Lower Bound, but there is no liquidity trap. You can always avoid deflation. It is insanely easy, but mentally it seems to be a big challenge for central bankers in most countries in the world.
I am pretty optimistic that the Fed’s actions over the past year is taking the US economy out of the crisis. I am optimistic that the Bank of Japan will win the fight against deflation. I am totally convinced that the Swiss central bank is doing the right thing and I am hopeful that Miroslav Singer in the Czech Republic is winning the battle to take the Czech economy out of the deflationary trap. And I am even optimistic that the recent global positive supply shock will help lift global growth.
However, the ECB is still caught in its own calvinist logic and seems unable to realise what needs to be done to avoid a repeat of the past failures of the Bank of Japan. The Swedish central bank remains preoccupied with macro prudential stuff and imaginary fears of a property market bubble, while the Swedish economy now caught is in a deflationary state. The Polish central bank continues to forecast that it will fail to meet its own inflation target, while we are inching closer and closer to deflation. I could mention a number of other central banks in the world which seem trapped in the same kind of failed policies.
Ben Bernanke once argued that the Bank of Japan should show Rooseveltian resolve to bring Japan out of the deflationary trap. Unfortunately very few central bankers in the world today are willing to show any resolve at all despite the fact that we at least Europe is sinking deeper and deeper into a deflationary trap.
Update: Former Riksbank deputy governor Lars E. O. Svensson comments on the Swedish deflation. See here.
Posted by Lars Christensen on November 13, 2013
Ambrose Evans-Pritchard at the Telegraph quotes me on the risk of deflation in the euro zone:
Lars Christensen from Danske Bank said the EU authorities are repeating mistakes made in Japan in the early 1990s when deflation became lodged in the system. “Several eurozone countries are already in outright deflation, and that is making it even harder to deal with banking problems and the debt trajectory. There is no growth in the money supply, so this is going to get worse, not better.
“This is just like Japan. The central bank thought money was easy when in fact it was much too tight. But effects could be much worse in Europe because unemployment is so much higher.”
Posted by Lars Christensen on November 6, 2013
This is Michael Steen in the Financial Times:
Inflation in the eurozone dropped unexpectedly to an annual rate of 0.7 per cent in October, far below the European Central Bank’s target of close to but below 2 per cent, and significantly increasing the chances of an interest-rate cut.
The so-called “flash” estimate by Eurostat, the EU’s statistical office, showed that the rate at which prices rise had slowed further since September, when it was 1.1 per cent, which is roughly what economists had expected for October.
A sharp outright fall in energy costs, by 1.7 per cent, drove the slowdown in the harmonised indices of consumer prices, which the ECB targets, but “core inflation”, which strips out energy, food, alcohol and tobacco, also fell to 0.8 per cent from 1 per cent.
I must say I am not the least surprised by the fact that the euro zone is heading for deflation. This is what I told The Telegraph’s Ambrose Evans-Pritchard back in March:
“Europe is heading into a deflationary scenario if they don’t do anything to boost the money supply,” said Lars Christensen… “This already looks very similar to what happened in Japan in 1996 and 1997.”
It is tragic, but what we are seeing now in Europe is exactly the same as we saw in Japan in the mid-1990s – a central bank that pursued extremely tight monetary policies, while it continued to maintain that monetary policy was indeed very easing. We all know the result of the Bank of Japan’s failed policies was 15 years of stagnation and deflation – and sharply rising public debt levels. The ECB unfortunately is copying exactly the policies of the (old) BoJ instead of learning the lesson from the new BoJ’s effective anti-deflationary policies.
As I have earlier argued the development in velocity and money supply growth in Europe today is very similar to what we saw in Japan around 1996-97. Not surprisingly the outcome is the same – extremely weak nominal GDP growth and deflationary tendencies. In fact the outcome is much worse. Unemployment in the euro zone just keep on rising – contrary to the situation in the US, where the Fed’s monetary easing over the past year has helped improve the labour market situation.
In fact the latest unemployment numbers for the euro zone published yesterday (Thursday) shows that unemployment in the euro zone has reached a record-high level of 12.2% in September and even worse youth unemployment is now 24.1%. It is hard not to conclude that the ECB is directly responsible for the millions of European being without a job. Yes, there are serious structural problems in Europe, but the sharp increase in unemployment levels in the euro zone since particularly since the ECB’s misguided rate hikes in 2011 is nearly totally the fault of the ECB’s extremely tight monetary policy stance.
We are heading for deflation
But lets get back to why deflation looks more and more likely in the euro. This is what I had to say about the matter back in March:
If you don’t already realise why I am talking about the risk of deflation then you just have to remember the equation of exchange – MV=PY.
We can rewrite the equation of exchange in growth rates and rearrange it. That gives us the the following model for medium-term inflation:
(1) m + v = p + y
(1)’ p = m + v – y
If we assume that money-velocity (v) drops by 2.5% y/y (the historical average) and trend real GDP growth is 2% (also more or less the historical average) and use 3% as the present rate of M3 growth then we get the follow ‘forecast’ for euro zone inflation:
(1)’ p = 3 % + -2.5% – 2% = -1.5%
So the message from the equation of exchange is clear – we are closer to 2% deflation than 2% inflation.
Yes, it is really that simple and the policy makers in the ECB should of course have realized this long ago.
End the euro crisis now with a 10% M3 target
There is only one way to avoid deflation in the euro zone and that is an aggressive monetary policy response in the form of a significant and permanent expansion of the euro zone money base within a clearly defined rule-based framework.
I would obviously prefer that the ECB implemented an clear NGDP level targeting rule, but less might do it – and a lot of other policy options would be preferable to the present mess.
The “easy” solution would be for the ECB to re-instate its former two-pillar monetary policy – a money supply (M3) growth target and an inflation target. Therefore, I suggest that the ECB imitiately issues the following statement (I have suggested it before):
“Effective today the ECB will start to undertake monetary operations to ensure that euro zone M3 growth will average 10% every year until the euro zone output gap has been closed. The ECB will allow inflation to temporarily overshoot the normal 2% inflation. The ECB has decided to undertake these measures as a failure to do so would seriously threatens price stability in the euro zone – given the present growth rate of M3 deflation is a substantial risk – and to ensure financial and economic stability in Europe. A failure to fight the deflationary risks would endanger the survival of the euro.
The ECB will from now on every month announce an operational target for the purchase of a GDP weighted basket of euro zone 2-year government bonds. The purpose of the operations will not be to support any single euro zone government, but to ensure a M3 growth rate that is comparable with long-term price stability. The present growth rate of M3 is deflationary and it is therefore of the highest importance that M3 growth is increased significantly until the deflationary risks have been substantially reduced.
The announced measures are completely within the ECB’s mandate and obligations to ensure price stability and financial stability in the euro zone as spelled out in the Maastricht Treaty.”
That would end the euro crisis, while also ensuring inflation around 2% in the medium-term. There would be no bailing out or odd credit policies. Only a clear and rule based policy to ensure nominal stability. How hard can it be?
Posted by Lars Christensen on November 1, 2013
The ECB is very proud of its 2% inflation target. The problem is just that it is not hitting it.
According to the ECB price stability is defined as “inflation rates below, but close to, 2% over the medium term”.
Today the ECB published it’s new inflation and growth forecasts. The ECB now forecasts 1.4% inflation in 2013 and 1.3% in 2014. That might be below, but it is certainly not close to 2%. In fact inflation has been nowhere close to 2% for five years (!) if you look at the GDP deflator rather than HCIP inflation.
So how does the ECB response to its own forecast that it will fail in deliver price stability in both 2013 and 2014? Well, by saying everything is just fine and no monetary easing is needed.
No further comments are needed – its just depressing…
PS don’t tell me that euro zone inflation is low because of a positive supply shock. In 2011 the ECB nearly killed the euro by hiking interest rates twice in response to a negative supply shock.
PPS with M3 growth just above 3% is it pretty easy to conclude that the euro zone is heading for deflation sooner or later.
Posted by Lars Christensen on June 6, 2013
This is from OECD’s Economic Outlook report published earlier today:
In the euro area, the area-wide fiscal consolidation (measured as an improvement in the underlying primary budget balance) of just over 4% of GDP between 2009 and 2013 was similar to that in the United States over the same period. This casts doubts about the role of fiscal tightening in explaining the comparatively weak performance of the euro area.
The OECD is of course completely right. The fiscal tightening in the US and the in euro zone have been more or less of the same magnitude over the last four years. So don’t blame ‘austerity’ for the euro zone’s lackluster performance.
The real difference between the euro zone and the US is of course monetary. The central bank can always offset the impact of fiscal tightening on aggregate demand. The fed has shown that, while the ECB has failed to do so. Rather the ECB continues to keep monetary conditions insanely tight. Aggregate demand is weak in the euro zone because the ECB wants it to be weak.
The ECB has failed. It is as simple as that and the OECD understands that.
HT Jens Pedersen
Posted by Lars Christensen on May 29, 2013
Somebody today sent me the following quote from the front page of today’s edition of the German business daily Handelsblatt (translated from German):
“The interest rate illusion: Europe’s central bank cuts interest rates to a historic low 0.5 percent. But the hope this will pull the euro zone out of recession will not be fulfilled, economists warn. On the contrary: the cheap money is dangerous.”
I am afraid that this is the general perception – not only in Germany but across Europe. But note how terribly inconsistent the comment is – monetary policy doesn’t work, but at the same time monetary easing is very dangerous (inflationary). If monetary policy does not work why would it be so dangerous to ease monetary policy?
The Handelsblatt also repeats the common fallacy that the level of interest rates tell us anything about whether monetary policy is easy of tight. Interest rates is NOT the price of money. The interest rate is the price of credit. Whether money is cheap or not is a matter of money demand vs money supply. Money demand still remains extremely elevated in the euro zone and money supply is extremely weak. Hence, monetary conditions are extremely tight – and this is exactly what the market is telling us. When German bond yields are extremely low it is exactly a reflection that monetary policy is TIGHT. As Milton Friedman used to say - interest rates are low when monetary policy has been tight. Besides that monetary conditions should of course be VERY EASY given the massive deflationary pressures, historically high unemployment and a very large negative output in the euro zone.
Europe is not on the verge of hyperinflation as the Handelsblatt seems to think. Europe is on the verge of deflation and anybody who have studied German history should understand the grave political and social dangers of deflation and for those who have a hard time remember here are the facts. In 1923 Germany had hyperinflation. 10 years later Germany was struggling with serious deflation and high unemployment. That brought Hitler to power – not easy monetary policy.
PS I did not read the entire Handelsblatt story and my comments should be seen as a general comment on the state of economic and monetary debate in Europe and I readily admit that I am greatly frustrated by the fact the powerfull interests are keeping the ECB from taking appropriate action to end this crisis. It is very easy to do.
PPS I suspect that the German fear of monetary easy really is not about monetary easing, but about bailouts. However, monetary easing is not a bailout.
Posted by Lars Christensen on May 3, 2013
Posted by Lars Christensen on April 29, 2013
If we want to explain the Market Monetarist position on banking crisis then it would probably be that banking crisis primarily is a result of monetary policy, but also that moral hazard should be avoided and a strict ‘no bailout’ policy should be implemented. However, the fact that Market Monetarists now for example favour aggressive monetary easing in the euro zone, but at the same time are highly skeptical about bailouts of countries and banks might confuse some.
I have noticed that there generally is a problem for a lot of people to differentiate between monetary easing and bailouts. Often when one argues for monetary easing the reply is “we should stop bailing out banks and countries and if we do it we will just create an even bigger bubble”. The problem here is that Market Monetarists certainly do not favour bailouts – we favour nominal stability.
I think that at the core of the problem is that people have a very hard time figuring out what monetary policy is. Most people – including I believe most central bankers – think that credit policy is monetary policy. Just take the Federal Reserve’s attempt to distort relative prices in the financial markets in connection with QE2 or the ECB’s OMT program where the purpose is to support the price of government bonds in certain South European countries without increasing the euro zone money base. Hence, the primary purpose of these policies is not to increase nominal GDP or stabilise NGDP growth, but rather to change market prices. That is not monetary policy. That is credit policy and worse – it is in fact bailouts.
As the ECB’s OMT and Fed’s QE2 to a large extent have been focused on changing relative prices in the financial markets they can rightly be – and should be – criticized for leading to moral hazard. When the ECB artificially keeps for example Spanish government bond yields from increasing above a certain level then the ECB clearly is encouraging excessive risk taking. Spanish bond yields have been rising during the Great Recession because investors rightly have been fearing a Spanish government default. This is an entirely rational reaction by investors to a sharp deterioration of the outlook for the Spanish economy. Obviously if the ECB curb the rise in Spanish bond yields the ECB are telling investors to disregard these credit risks. This clearly is moral hazard.
The problem here is that a monetary authority – the ECB – is engaged in something that is not monetary policy, but people will not surprisingly think of what a central bank do as monetary policy, but the ECB’s attempts to distort relative prices in the financial markets have very little to do with monetary policy as it do not lead to a change in the money base or to a change in the expectation for future changes in the money base.
That is not to say that the ECB’s credit policies do not have monetary impact. They likely have. Hence, it is clear that the so-called OMT has reduced financial distress in the euro zone, which likely have increased the money-multiplier and money-velocity in the euro zone, but it has also (significantly?) increased moral hazard problems. So the paradox here is that the ECB really has done very little to ease monetary policy, but a lot to increase moral hazard problems.
Unfortunately many of those policy makers who rightly are very fearful of moral hazard – normally Northern European policy makers – fail to realise the difference between monetary policy and credit policy. German, Finnish and Dutch policy makers are right in opposing a credit based bailout of South European “sinners”, but they are equally wrong in opposing an monetary expansion.
The paradox here is that Northern European policy markets by opposing monetary easing in the euro zone actually are increasing the problem with moral hazard and bailouts. Hence, when monetary policy is too tight nominal GDP (and likely also real GDP) collapses. As a result debt ratios increase – and this goes for both private and public debt. That will cause both sovereign debt crisis and banking crisis, which is perceived to threaten the future of the euro. The threat to the future of the euro so far has convinced Northern European policy makers to going along with bailouts and implicit and explicit guarantees to banks and countries around the euro zone. Hence, the ECB’s overly tight monetary policy likely have INCREASED moral hazard problems.
Europe needs to return to a system where insolvent banks and countries are allowed to default. We need to end the bailouts. The Northern Europeans are completely right about that. However, we also need to end the deflationary policies of the ECB, which greatly increases public debt and banking problems.
It is certainly not given that even if the ECB brought the NGDP level back to the pre-crisis trend everything would be fine. I am fairly convinced that the removal of implicit and explicit guarantees would force banks and countries to deleverage further. Moral hazard problems and bailouts have led to excessive risk taking. There is no doubt about that, but if the ECB (and the Fed!) focuses on maintaining nominal stability we can get an orderly return to a market based financial system where credit risks are correctly priced.
And finally solvency problems should not be dealt with through monetary or credit policy. If a country is insolvent then the only answer is an orderly debt restructuring. Similarly if banks are insolvent orderly bank resolution is needed. Monetary policy at the same time should ensure that bank resolution and debt restructuring do not lead to a negative shock to monetary conditions. The best way to do that is to keep NGDP on track.
Update: This is a greeting to the University of Chicago Monetary Policy Reading Group. This week the group is reading and discussing Ben Bernanke’s classic 1983 paper “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression”. In this paper Bernanke discusses his creditist view of the Great Depression. I believe that these views are what led the Bernanke Fed to initially response to the Great Depression with credit policies (trying to “fix” the banks) rather than through a focused increase in the money base and the money supply.
My challenge to the UoC Monetary Policy Reading Group they should discuss how Fed policy has evolved from initially to be strongly focused on credit policies (QE2) to moving towards a monetary expansion (the Bernanke-Evans rule) and comparing the Bank of Japan’s new policy which is much more focused on an expansion of the money base rather than an attempt to distort relative prices in the financial markets. This is Friedman versus Bernanke.
Posted by Lars Christensen on April 22, 2013