Re:What Economists Still Don’t Get About the 2008 Crisis
by nickik on Monday July 30, 2018 @03:26PM
(#17647227)
Totally agree with your post, I explain it like this:
The problem with the old monetarists was always that they assumed a constant demand of money (or velocity) how they called it. Now they had some empirical reasons for this (see PhD under Friedman) but they missed something that earlier economists had already figured out. Namely that monetary demand can shift for all kinds of reasons and that any good monetary system needs to adjusts to that.
However they were totally correct on interest rate and that interest rate are a terrible guide for monetary policy.
When you actually study New-Keynesian it is perfectly clear that it is not the interest rate that sets monetary policy (or indicts it) but rather interest rate relative to the natural rate. Why New-Keynesian never explain this to anybody when giving interviews or anything like that boggles my mind sometimes.
So in New-Keynesiansim everything hinges on your assumption of the natural rate. 1% interest rate can be contracting or expeditionary depending on the natural rate.
What happened in 2008 is actually quite simple, the Fed had the interest rate fixed and didn't lower it (inflation fears because of oil prices, see FOMC meeting late 2008).
While in the real economy the natural rate was making the Fed policy more and more contractility.
Modern monetarists (Market Monetarists) like Scott Sumner have been point this out since 2009 of course.
The problem with the old monetarists was always that they assumed a constant demand of money (or velocity) how they called it. Now they had some empirical reasons for this (see PhD under Friedman) but they missed something that earlier economists had already figured out. Namely that monetary demand can shift for all kinds of reasons and that any good monetary system needs to adjusts to that.
However they were totally correct on interest rate and that interest rate are a terrible guide for monetary policy.
When you actually study New-Keynesian it is perfectly clear that it is not the interest rate that sets monetary policy (or indicts it) but rather interest rate relative to the natural rate. Why New-Keynesian never explain this to anybody when giving interviews or anything like that boggles my mind sometimes.
So in New-Keynesiansim everything hinges on your assumption of the natural rate. 1% interest rate can be contracting or expeditionary depending on the natural rate.
What happened in 2008 is actually quite simple, the Fed had the interest rate fixed and didn't lower it (inflation fears because of oil prices, see FOMC meeting late 2008).
While in the real economy the natural rate was making the Fed policy more and more contractility.
Modern monetarists (Market Monetarists) like Scott Sumner have been point this out since 2009 of course.