After reading this quote from a recent post by Scott Sumner:
In my view this is why monetarism looks so out of touch with reality for many people with feet firmly planted in the real world. They see some “obvious” problem like a housing bust, which really is a problem. It’s capable of reducing RGDP growth by say 1%. Then they see a demand-side recession follow soon after. They see no sign of tight money (recall that rates are low.) So they can’t imagine how this mysterious “tight money” could have caused the recession. But as we saw with Australia, if the central bank keeps NGDP growing (at least in terms of two year averages) then RGDP can hold up pretty well, despite a big drop in exports. Australia had the growth slowdown that we and the Europeans should have had, if we’d been following a NGDP level targeting approach.
I thought it would be interesting to see if “results” varied according to whether central banks kept nominal spending (NGDP) growing.
And it seems “nominal spending rules”. The panel below considers a sample of six countries. The countries in the left hand column are those that either did not let spending growth contract or, as in the case of Sweden, quickly reversed the mistake. The right column countries allowed nominal spending to contract and have yet not managed to “get it up” sufficiently to significantly affect real output growth.
It´s interesting to observe, for example, that a strong reduction in government spending in Sweden did not stop it´s real output from rising significantly more than is the case in the UK or the US, where government spending decreased much less. These examples are graphed in the next panel. In Sweden´s case “austerity was expansionary” because monetary policy “made it so”. Note also that although Poland and Australia did not reverse the increase in the government spending that took place when the global financial crisis hit, that´s not what appears to be driving the increase in real output in those countries because as observed France did not reverse the increase either, but as nominal spending in France didn´t “take off”, real growth remained anemic.