We told you so – the two graph version

The Market Monetarist “textbook” will tell you two things:

1) The Friedman yield dictum: Credible monetary easing will push up bond yields as the market price in higher NGDP growth and higher inflation

2) The Sumner Critique: The fiscal multiplier is zero when the central bank in some way targets aggregate demand (inflation targeting, price level targeting NGDP targeting etc.)

Here are two graphs that will tell you that we are right.

We start 10-year Japanese bond yields. Look at the spike in yields since Bank of Japan governor Kuroda announced his new measures to achieve the BoJ’s new 2% inflation target. This is exactly what Market Monetarists have been saying all along – a credible easing of monetary policy will push up NGDP growth expectations and hence push up bond yields.

Kuroda shock

And if you are getting nervous about either the rise in yields “killing the recovery” or threathening debt sustainability in Japan let me just say that one never should reason for a (one!) price change. The increase in yields exactly reflect the expectation of a recovery rather than the other way around. Regarding debt sustainability remember that the rise in yields reflects that monetary easing is increasing NGDP. Hence, debt ratios in Japan will likely decrease rather than increase even if yields are rising.

On to the next graph. The Keynesian fiscalists have been screaming about the risks of the fiscal cliff sending the US economy back into recession. On the other hand than the Market Monetarist position has been clear – monetary policy dominates fiscal policy if the Federal Reserve in anyway targets aggregate demand. The Bernanke-Evans rule is doing exactly that. That is why Market Monetarists like myself has been fairly upbeat about the outlook for the US economy since September when the BE rule was announced.

US macroeconomic data now seem to confirm the MM position. Take a look at US retail sales.

US retail sales

I find it very hard to spot any negative effect of the fiscal cliff, but it is pretty clear that the Bernanke-Evans rule has boosted retail sales in the US.

Since the begining to the crisis Market Monetarists have been arguing that monetary policy is highly potent even if interest rates are close to zero. I think the evidence now is very clear and it shows that we have been right. I wonder whether the ECB will start to listen soon…

Update: David Beckworth tells essentially the same story as me on the Market Monetarist bias of US macrodata.

Leave a comment


  1. Lars, I agree fully. My only complaint is that the Fed has used only 10% of the ‘car´s’ power! Look, for example, how powerful even QE1 was:

  2. Ravi

     /  May 14, 2013

    I agree that higher bond yields won’t threaten debt sustainability. I do wonder though – my impression is that the Japanese banking system invests heavily in JGBs (probably too much, because of poor economic expectations for most of the past 20 years). I’m not enough of an expert but I think there is a probability that Japanese banks will take losses on their JGB holdings. Does that sound right, and could that cause a financial crisis?

  3. “Told you so moment” – one of my favorite things

  4. Benjamin Cole

     /  May 15, 2013

    Print more money, then print more money, and then print even more money.

    Monetize debt, and think in terms of trillions and trillions of dollars.

    Sometimes, the prudent thing is not to do nothing.

    The risk is that the central banks are too timid, feeble, weakling. They lack resolve and heart in stimulating the economy, They will fold in the face of minuscule inflation rates.

    Not that they will print too much money.

  5. James in London

     /  May 15, 2013

    Off topic, but do you have any idea why Canada is not doing more to stimulate it’s economy? 1% inflation, 1% expected RGDP growth, yet they have a tightening bias. I don’t understand. And I worry a bit that Carney is leaving Canada in not such a good state.

    The Australians seem to have “got with the programme” and cut rates. What’s up, up there?

  1. Monetary Policy Round Up | worldofinterest

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: