Friday, January 5, 2018

da Costa: "monetary policy ... may have little or no effect on the flow of aggregate demand."


This is false; monetary policy has a very significant effect on economic activity... more than is generally understood.




7 comments:

Calgacus said...

monetary policy has a very significant effect on economic activity... more than is generally understood.
Really? That is Milton Friedman monetarism. One of the worst hallucinations of mainstream econ is its obsessive exaltation of monetary policy. Which in most situations and outside of drastic, Volcker size changes, doesn't do all that much. Along with preposterous dismissal of fiscal policy as ineffective - something which nobody can really believe.

Matt Franko said...

It’s not benign...

Ralph Musgrave said...

There’s a more serious defect in artificial adjustments to interest rates (not mentioned in that Naked Capitalism article). It’s this.

It’s widely accepted in economics that the GDP maximising price for anything is the free market price, unless market failure can be demonstrated. Ergo the rate of interest should simply be the free market rate: i.e. artificial interference with interest rates should be largely done away with, with AD being adjusted via fiscal policy.

The arguments there are a bit complicated, but I put an article on this topic on my blog a couple of days ago. See:

http://ralphanomics.blogspot.co.uk/2018/01/artificial-interest-rate-adjustments_91.html

Neil Wilson said...

"It’s not benign"

It has uncertain distribution characteristics that are not at all well understood. Much like the foreign exchange markets. And most importantly it tries to control the economy by pushing private debt which is systemically unstable - even if it makes bankers a lot of money.


Matt Franko said...

I would agree with those things Neil but this journos assessment is still false as is MMTs...

When these monetarist policy makers do their thing it has effects on economic outcomes...

Matt Franko said...

"Ergo the rate of interest should simply be the free market rate:"

Ralph the govt sets the "risk free rate" which is used in the CAPM equation

https://en.wikipedia.org/wiki/Capital_asset_pricing_model

Setting this rate to permanent zero would spike prices UP drastically...

This phenom is happening right now as we see the equity prices going up every day/week/month as the Fed is keeping the risk free rate very low...

As the Fed keeps delaying meaningful increases in the risk free rate the PV of the future earnings of the firms keeps going up and up ...

Unless the Fed gets going on raising the risk free rate these stock markets will keep adjusting to higher price levels...

Matt Franko said...

iow Ralph, if they were to set the Risk Free Rate to zero as you say, if you look at the CAPM equation the price level goes asymptotic (ie straight up...)

Question is WHY is the Fed going so slowly?