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March 13, 2013



Haven't most (or all) of these mathematically models that choose their conclusion and work backward been completed discredited by now? Hasn't it been shown conclusively that both fiscal and monetary policy affect output under all conditions (but especially fiscal policy in a liquidity trap, while monetary policy is comparatively powerless).

Ian Pallet

This smells of German policy making made in a smokey room in the backstreets of Brussels.


"You might think it's simple, because the model uses a dubious LM curve."

The equation works fine at fixed exchange rates or under gold standard conditions. And so does the LM curve.
However, nowadays "goverment bonds" or even "stocks" are as liquid as "cash". Lehman was the last nail into the coffin of gold standard / LM-curve as I doubt any central bank would like to experience Lehman reloaded.

Ralph Musgrave

The absurdity of monetary policy alone (assuming that means interest rate adjustments) is that it involves skewing the economy towards or away from investment (or other lending based forms of activity). There is no more a reason for that than there is for skewing the economy towards baked beans or car production.

The absurdity of fiscal policy alone is that it is to a greater or lesser extent stymied by crowding out.

The solution is to combine the two: i.e. just have the government / central bank machine create and spend money into the economy when needed. That’s the policy advocated by Modern Monetary Theory, Positive Money and various other groups.


Not all countries can have a depreciating currency but all countries can undertake a major and (in effect) coordinated monetary easing. That might leave exchange rates roughly where they are but would get world aggregate demand and output growing much more quickly. Osborne's misfortune was to do fiscal consolidation with a B of E too focused on inflation and not enough on output and employment. Hopefully that will now change with Carney. And hopefully we are also now in the early stages of a big time global monetary easing.


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