1 picture=1000 words, 3 pictures=3000 words?

Both Scott Sumner and David Beckworth say the same thing: What the Fed wants is that nominal expenditure growth (NGDP) gets translated into as much real growth as possible. So, “talking” about “wanting” 2% inflation is “bollocks”. As David makes clear, that´s true IF inflation expectations are anchored. In that case stabilizing nominal expenditures is the “trick” that allows smooth growth, low unemployment and low inflation.

The figure below reproduces David´s picture with minor changes (I consider PCE-core price inflation instead of the GDP deflator). The Greenspan years indicate that a “Great Moderation” is possible to achieve and “perpetuate”, even if the talk is always about the “inflation fighting credentials” of the Central Bank. The ultimate cause is the maintenance of “monetary equilibrium”, which requires that changes in money demand (velocity) are offset with changes in the stock of money.

The next figure shows that during the period of the “Great Inflation”, from around 1965 to 1979, inflation expectations weren´t anchored so that growth in nominal expenditures were mostly reflected in changes in inflation. Real growth was very volatile. The oil price (supply) shock, which increases inflation and reduces real growth, is clearly visible. To Arthur Burns, there was nothing monetary policy could do and nominal expenditures were increased to reduce unemployment, with inflation control being the province of “incomes policy”. The result: more inflation.

The last figure provides a nice view of why the “Great Moderation” was lost in 2008. Contrary to the Greenspan years, Bernanke did not offset the fall in velocity (increased money demand resulting from “greater uncertainty”). In fact, the money stock fell! Now they are faced with the uphill battle of bringing the economy back to close to the trend path from which it dropped in 2008-09. But the “inflation paranoia” is very much alive, with important representatives residing in the FOMC!

7 thoughts on “1 picture=1000 words, 3 pictures=3000 words?

  1. very well exposed. For me the rise and inmediate fall of M2 and MZM (following money base) before the end of recession is a great mistery. A wrong calculation that the recovery was well under way? Did Bernanke think that the financial stabilisation was the only important and it was done?
    For me is not, as Sumner says, a problem of late monetary expansion, but a problem of too soon interrupted one.
    In any case, how much betwen words and facts.
    BTW, How to explain this in Spain where almost nobody is concious of the monetary problem?

  2. A credit channel is the view of Bank of Spain. And is the view of the EBC. But I tend to think that both visions -quantitative & credit channel are not incompatible Totally. I think there colud be other reasons, as fear to be cruxified as Greenspan.
    Here, in Spain, the main libertarian media (libertad Digital) has claimed prison to both G & B. Jajajajaja
    BTW, no important media has a minimal critic to Trichet, a sacred cow. Nobody see the impossibility of recovery without a change in MP. All economists defend that it depends of structural changes.
    JCT is very critisized in US and Europe. Are we Masochist?

    • Yes, the number of transmission channels is large (Mishkin, I think, lists 10). The problem is when you give almost absolute importance to one – in this case the credit channel – which induces almost indiscriminate bail-outs, and “forget” about all the others.

  3. it is clea. Do You think it is possible to surround these channels, as Friedman said for the deflation in Japan? He said that the bank of Japan most to buy directly to de public de japan debt hoarded by them -if I remember.

  4. Pingback: TheMoneyIllusion » The things we teach that aren’t true

  5. Pingback: The Best Way to Narrow the Fed’s Mandate-Economic News |Coffee At Joe's

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