ALL BLOG POSTS
...Al Roth and Lloyd Shapley "for the theory of stable allocations and the practice of market design".
Imagine a 4% inflation target - this year's Chinese inflation target - trend real GDP growth 10-11% and money-velocity growth between -1% and 0% then the money supply (M1) should grow by 15-16% to ensure the inflation target in the medium term. This is more or less a description of Chinese monetary policy over the past decade.
When we study macroeconomic theory we are that we are taught about "money neutrality". Normally money neutrality is seen as a certain feature of a given model. In traditional monetarist models monetary policy is said to be neutral in the long run, but not in the short run, while in Real Business Cycle (RBC) models money is (normally) said to be neutral in both the long and the short run. In that sense "money neutrality" can be said to be a positive (rather than as normative) concept, which mostly is dependent on the assumptions in the models about degree of price and wage rigidity.
Opponents of NGDP level targeting often accuse Market Monetarists of being "inflationists" and of being in favour of reflating bubbles. Nothing could be further from the truth - in fact we are strong proponents of sound money and nominal stability. I will try to illustrate that with a simple thought experiment.
My readers will know that I think that the Federal Reserve has taken a step in the right direction with its latest policy action. I do think that the fed finally after four years of failure is moving towards a more rule based monetary policy. However, it is certainly far from perfect and there is still a lot of risks involved.
Bernanke says Friedman would have approved of Fed's recent actions - I think is he more or less right
Ben Bernanke today in a speech further tried to explain the Fed's recent policy actions. As Scott Sumner says in a comment: "The Fed seems to be getting a bit more market monetarist each day". That might be slightly too optimistic of what is going on at the Fed and I remain frustrated about about two things in how Bernanke is communicating. First he is focusing on real variables (the labour market) rather than on nominal variables. Second, his discussion of the monetary transmission mechanism is overly focused on yields and interest rates rather than on money creation. That said, I continue to believe that the Fed is moving in the right direction. Bernanke's speech today is further prove of that and I must say I feel increasingly optimistic that this will pull the US economy out of the crisis.
I am still in Provo Utah and even though I have had a busy time I have watch a bit of Bloomberg TV and CNBC over the last couple of days (to fight my jet lag). I have noticed some very puzzling comments from commentators. There have been one special theme and that has come up again and again over the last couple of days among the commentators on US financial TV and that is that "yeah, monetary easing might be positive for the markets, but it is not have any impact on the real economy". This is a story about disconnect between the economy and the markets.