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We have family from New Zealand visiting us in Denmark these days so I have been paying a bit more attention to the Kiwi economy than I normally would - and particularly to Kiwi monetary policy.
Market Monetarists have stressed it again and again - the European crisis is primarily a monetary crisis rather than a financial crisis and a debt crisis. Tight monetary conditions is reason for the so-called debt crisis. Said in another way it is the collapse in nominal GDP relative to the pre-crisis trend that have caused European debt ratios to skyrocket in the last four years.
Here is Alan Blinder in a paper - "Issues in the Coordination of Monetary and Fiscal Policy" - from 1982:
One of the hottest political topics in the US today is the so-called fiscal cliff. The fiscal cliff is the expected significant fiscal tightening, which will kick in January 2013 when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 expires - unless a deal is struck to postpone the tightening. The fiscal cliff is estimated to amount to 4% of GDP - hence a very substantial fiscal tightening.
The Independent Institute is out with a new book edited by our own David Beckworth: Boom and Bust Banking: The Causes and Cures of the Great Recession. David of course is one of the founding father of Market Monetarism and despite the somewhat Austrian sounding title of the book the book is primarily written from a Market Monetarist perspective.
Last week we got GDP numbers for Q2 in both the Czech Republic and Hungary. Both countries plunged deeper into recession and as it is the case in most other countries in Europe the cause of the misery is monetary disorder. This is documented in two news pieces of research. One on Hungary by Steve Hanke and one the Czech Republic by myself.
I have recently written a number of posts (here and here) in which I have been critical about Arthur Laffer's attempt to argue against fiscal stimulus. As I have stressed in these posts I do not disagree with his skepticism about fiscal stimulus, but with his arguments (and particularly his math). It is therefore only fair that I try to illustrate my view on fiscal stimulus and why fiscal stimulus (on it own) is unlikely to work.
I often ask myself what Milton Friedman would have said about the present crisis and what he would have recommended. I know what the Friedmanite model in my head is telling me, but I don't know what Milton Friedman actually would have said had he been alive today.
Barry Eichengreen provides a Summer reading list for European policy makers in his latest article on Project Syndicate. Here is Eichengreen: