The Global Monetary Policy Network now on Linkedin

You will now find the Global Monetary Policy Network on Linkedin. You will find it here.


15 years too late: Reviving Japan (the ECB should watch and learn)

After 15 years of deflationary policies the Bank of Japan now clearly is changing course. That should be clear to everybody after today’s policy announcement from the Bank of Japan. I don’t have a lot of writing here other than I will say this is extremely good news. Good for Japan and good for the global economy and what the BoJ is doing is nearly textbook style monetary easing. The only minus is that the BOJ is targeting inflation and not the NGDP level, but anyway I am pretty convinced this will work and work soon.

Anyway lets pay tribute to Milton Friedman. This is Uncle Milty in 1998 in his article “Reviving Japan”:

The surest road to a healthy economic recovery is to increase the rate of monetary growth, to shift from tight money to easier money, to a rate of monetary growth closer to that which prevailed in the golden 1980s but without again overdoing it. That would make much-needed financial and economic reforms far easier to achieve.

Defenders of the Bank of Japan will say, “How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”

The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.

This is what the BoJ announced today:

Under this guideline, the monetary base — whose amount outstanding was 138 trillion yen at end-2012 — is expected to reach 200 trillion yen at end-2013 and 270 trillion yen at end-2014.

The monthly flow of JGB (Japanese Government Bonds) purchases is expected to become 7+ trillion yen on a gross basis.

The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years. In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base and the amounts outstanding of Japanese government bonds (JGBs) as well as exchange-traded funds (ETFs) in two years, and more than double the average remaining maturity of JGB purchases.

After 15 years the BoJ is finally listening to Friedman’s advice and I am sure it will do a lot to revive the Japanese economy. In fact the BoJ is doing more than listening to Milton Friedman. The BoJ is also listening to the Market Monetarist message of using the Chuck Norris Effect by guiding market expectations. Good work Kuroda.

And finally a message to ECB boss Mario Draghi. If you want to end the euro crisis just copy-paste today’s BoJ statement. You have the same inflation target anyway. It is not really that hard to do.

Steve Horwitz’s “Introduction to US Monetary Policy”

Steve Horwitz is out with an new paper – “An Introduction to US Monetary Policy”. I haven’t read the paper yet, but I am sure it is very good. Steve always writes interesting and insightful stuff about monetary policy issues. I hope to find time to read it in the coming days, but until I have more to say about that paper you should have a look. Here is the abstract:

This study examines the history and operation of the Federal Reserve System (“the Fed”). It explores the Fed’s origins in American economic history and emphasizes the political compromises that produced it. It seeks to provide an accessible explanation of how the Fed attempts to change the money supply and of the structural challenges it faces as it attempts to get the money supply correct. The paper uses the framework thereby developed to examine recent monetary policy, including quantitative easing. Inflation and deflation result when the Fed creates too much or too little money, and the study discusses the causes and costs of both in detail. The paper concludes with an examination of alternatives to central banking, including the gold standard and a system of competition in money production known as free banking

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