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I've been reading through Anna Schwartz's papers on monetary economics and I think they're the real story on what economists still don't get about the 2008 cris
by zjacobi 8y ago
I've been reading through Anna Schwartz's papers on monetary economics and I think they're the real story on what economists still don't get about the 2008 crisis.
If you read through the old monetarist research, you see that change in money supply has a better correlation with recession than basically anything else. This holds true even when you control for the possibility of reverse causation, when you make sure that you're actually dealing with a leading indicator of this cycle rather than a lagging indicator of the next cycle, etc, etc.
Keynesians think that the only measure of how tight or loose monetary policy is comes from interest rates, so they can't wrap their heads around how 1% interest rates can still be tight money. The real story of the economics crisis is that the banking crisis deposit:reserve ratio through the floor. This means that a bunch of money disappeared as banks preferred liquidity. The central bank didn't do enough to replace this money, so people couldn't hold the money balances they wanted and stopped spending. The Fed said they were doing all they could to spur inflation, but that's obviously false. The central bank can always inflate the currency and the fact that they weren't hitting their inflation targets shows that they had tight money.
Keynesians ultimately don't think money is important enough to model and until they change that, they're going to be confused.
- nickik 8y agoTotally 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.
- mindcrime 8y agoI've been reading through Anna Schwartz's papers on monetary economics... Not being familiar with Anna Schwartz, I went googling and came up with these two links... posting here in case anybody else was wondering as well. https://library.duke.edu/rubenstein/findingaids/schwartzanna/ https://library.duke.edu/rubenstein/findingaids/schwartzanna... http://www.nber.org/people/anna_schwartz http://www.nber.org/people/anna_schwartz