Finding wisdom in letters to The Economist

Finding wisdom in letters to The Economist
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.



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