It is always a pleasure to read The Economist. Normally, however, I do not find the letters to the editor especially interesting. However, when I picked up this week’s edition of the magazine today I stumbled on an interesting letter from Paul DeRosa. Mr. DeRosa writes about what Milton Friedman might have thought of the present crisis.
Here is from Mr. DeRosa’s letter to The Economist:
“At a seminar once, I remember hearing him [Friedman] make the generalization that monetary policy is easy only when the prices of assets are rising faster than the prices of the goods they produce…In any case, this thought applied to any reasonable constructed index of asset prices reveals that the Federal Reserve is barely on the easy side of neutral, and the European Central Bank has Europe in death grip”
I find Mr. DeRosa’s comments extremely interesting. The comments are interesting because it indicates that Milton Friedman indeed paid attention to asset prices as an indicator for the monetary policy stance – something that of course is at the core of Market Monetarism. Second, I believe the Mr. DeRosa’s conclusion is entirely correct – the markets are clearly telling us that monetary policy in the euro zone is insanely tight – and that the Fed is not doing a much better job.
Nick Rowe
/ August 3, 2012Hmm. That is an interesting measure of the stance of monetary policy. And interesting too that Friedman said it. Notice that it’s *rising* rather than *high* relative asset prices.
Lars Christensen
/ August 3, 2012Nick, I agree. I must say I am slightly suspect about this as I have not see Friedman say this kind of thing at other occasions. However, it is nonetheless interesting.
Saturos
/ August 4, 2012Lars and Nick, perhaps Arnold Kling’s latest is relevant here: http://econlog.econlib.org/archives/2012/08/stocks_the_long.html
I.e. stocks rising faster than output.
Also, in “Factors Affecting the Level of Interest Rates”, from a speech he gave to the United States Savings and Loan Society in 1968, Friedman says (while discussing the transmission mechanism for monetary expansion):
(my emphasis)
I’ve been crusading in vain to get more people to read this. (He begins the speech by distinguishing between money and credit, before going on to emphasize the unreliableness of interest rates in indicating the stance of monetary policy.)
Saturos
/ August 4, 2012Whoops, the emphasis should have been around. (I wanted to emphasize the text that’s not italicized.)
Lars Christensen
/ August 4, 2012Saturos, you are right this is very interesting! And I promise to have a closer look at Friedman’s speech asap.
Saturos
/ August 4, 2012Then there’s this: http://www.economist.com/node/21559365