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February 04, 2013


a money illusionist

Fiscal policy is not a proven way of boosing AD. Much economics literature suggests it merely robs Peter to pay Paul and has no net benefit. Raising AD via NGDP targetting is unambiguous. And a central bank can do this willy nilly, even at zero interest rates. It just has to threaten to buy assets until it gets what it wants. As long as the end goal is clear it probably won't have to buy any assets. The problem is that QE-driven central bankers have no real idea what their end goal really is and that leaves the market utterly confused, and not doing the job it could be doing.

Draghi's OMT and Japanese PM's 2% inflation target have both boosted markets and NGDP expectations. If the market is right, and we have to assume it is, then these policies are working without the use of guns.

[scott summner at themoneyillusion.com regularly puts this "much better than I", as he would say, he is sometimes funny too]

Nick Rowe

Chris: "Now, this absurdity was not supposed to arise."

Yep. But it did. Take Canada as an example. No (real) financial crisis, no (obvious) supply shocks, and the Bank of Canada kept inflation very close to the 2% target (total inflation wiggled up and down a bit, but core stayed close to target) and yet unemployment increased. You could see the recession everywhere, except in the inflation numbers.

Welcome to the club!


a money illusionist:
"Fiscal policy is not a proven way of boosing AD. Much economics literature suggests it merely robs Peter to pay Paul and has no net benefit."

Nothing in economics is proveable but fiscal expenditure is a sure fire a way of raising output and demand as any and more sure fire than monetary policy. The US fiscal stimulus appeared to boost demand as did Labour's stimulus package prior to the election. China did just fine too after the crash due to fiscal boost. If it walks and talks like a duck...

Frances Coppola

Sigh. After all this time we STILL don't understand stagflation....

a money illusionist

1 The US fiscal stimulus was massive, the effect very modest if noticeable, and had little impact on unemployment.
2. Labour's stimulus was incredibly short term in effect, again if noticeable. UK NGDP is still way below trend, income even lower.
3. China coped better as it had much higher NGDP growth to start with and more flexibility in nominal terms to cope with real shocks. The massive bank loan expansion's benefits are still debatable.

Monetary policy is key to provide nominal room for real shocks, because of money illusion/downward wage stickiness, fiscal policy cannot do this.


1. The US fiscal stimulus was not that big at all in terms of the lost output [economy lost over $1.3Tn per annum output and stimulus was only two thirs of that and spread over two years] and the CBO estimated a net impact on jobs of 2.4 million jobs whereas over 7 million jobs were actually lost.
ie;they underestimated the magnitude of the recession.
2.Labour's stimulus was cut short by coalition so of course it run it's course and reversed along with the austerity, as one would expect.
3.China coped better because its stimulus was massive in real terms, far greater than that of either the UK or US.
The fall in UK output since 2007 is almost entirely dues to the drop in investment, both private and public. Monetary policy in this environment [demand led slump with near zero int' rates]is like pushing on a string and needs to be accompanied by fiscal expansion not instead of. [Japan to provide more data shortly ;)]

gastro george

Are we certain that fiscal stimulus in the current climate is going to lead to inflation?


What is the nature of the stimulus ?

Who are the beneficeries of the stimulus ?

Will the stimulus be syphoned off by the existing debt and the unreformed banking/credit system ?

QE has so far been used to benefit the banks and stock markets.

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Maybe you have never really understand my existence.

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