News of Berlusconi once again slipped into the financial section

This is from CNBC:

European shares quickly cut their earlier gains to end mixed after a projection by Italian TV showed the center-right party, led by former leader Silvio Berlusconi, leading in elections for the Senate vote. Meanwhile, Italian state TV station RAI said none of the four main groups running in the Italian parliamentary election is likely to win a majority in the Senate. A coalition or party must win at least 158 of the 315 Senate seats to gain a majority in the upper house, which a government would need to pass legislation.

Investors have been closely watching the outcome of the Italian election as the government’s decision over the next few months could influence whether Europe can stem its financial crisis. Italy is the euro zone’s third largest economy.

Once again I am reminded of one of my favourite Scott Sumner quotes:

I once read all the New York Times from the 1930s (on microfilm.)  You can’t even imagine how frustrating it was.  They knew they had a big problem.  Then knew that deflation had badly hurt the economy (including the capitalists.)  They knew that monetary policy could reflate.  And yet . . .

Weeks went by, then months, then years.  Somehow they never connected the dots.

“Monetary policy is already highly stimulative.”

“There’s a danger we’d overshoot toward too much inflation.”

“Maybe the problems are structural.”

“There are green shoots, things are getting worse at a slower pace.  The economy needs to heal itself.”

“Consumer demand is saturated.  Even workingmen can now afford iceboxes and automobiles.  We produced too much stuff in the 1920s.”

And the worst part was the way political news kept slipping into the financial section.  Nazis make ominous gains in the 1932 German elections, Spanish Civil War, etc, etc.  In the 1930s the readers didn’t know what came next—but I did.

Last time I used Scott’s quote I wrote the following, which I think is pretty telling of today’s markets:

Since August-September the Federal Reserve and the Bank of Japan the have moved in the direction of easing monetary policy and a significantly more ruled basked monetary policy and even the ECB has eased up with ECB chief Draghi’s promising to do “whatever it takes” to save the euro. And Mark Carney has given investors hope that the Bank of England will move towards some form of NGDP level targeting. As a result the “euro crisis” has more or less disappeared from the headlines in the newspapers’ “financial section” (just take a look at what Google trends has to say).

Hence, it seems pretty clear that the markets’ “responsiveness” to political worries is a function of the tightness of global monetary conditions with tighter monetary conditions leading to a bigger impact of political jitters.

The Fed – and every other central bank in the world – can effectively protect the US economy from negative spill-over from the European political jitters by introducing a proper monetary target – preferably an NGDP level target (the Bernanke-Evans rule already helps a lot).

Related posts:
Spanish and Italian political news slipped into the financial section
Greek and French political news slipped into the financial section
Political news kept slipping into the financial section – European style
“…political news kept slipping into the financial section”


Working paper of the day – Straumann et al on Switzerland, the Great Depression and the gold standard

A couple of weeks ago I came across a great paper by Peter Rosenkranz, Tobias Straumann and Ulrich Woitek – “A Small Open Economy in the Great Depression: the Case of Switzerland”. It is great paper. Here is the abstract:

Estimating a New Keynesian small open economy model for the period 1926-1938, we investigate the causes of the slow recovery of the Swiss economy of the Great Depression in the 1930s. Our results show that the decision to participate in the gold bloc after 1933 at an overvalued currency can be identified as the main reason for the unusual long lasting recession. Even the recovery of the world econ- omy starting in 1931/1932, and thus a boost of foreign demand could not offset the negative effects of disadvantageous terms of trade. A counterfactual experiment demonstrates that in case of leaving gold earlier (e.g. together with the UK in 1931), the Swiss economy would have recovered much faster, almost immediately reaching the pre-crisis output level.

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