Both fail, but the ECB failure hurts more!

Ryan Avent has this post “The biggest problem” in which, comparatively, the Fed ‘looks good’.

He puts up a comparative NGDP growth chart:


And writes:

The red line shows year-on-year growth in the euro zone’s nominal output or, if you like, how much more money, in euro terms, is being spent across the euro area relative to the year prior. The blue line shows the same number, in dollar terms, for the American economy. The large divergence at the end corresponds to the large divergence in the performance of real growth and unemployment.

Now a dip in nominal growth will often result from a real factor. But a sustained decline in nominal growth is the central bank’s fault. It can’t prevent a drop in the productive potential of an economy (thanks to, say, the mysterious loss of its long-time offshore banking centre). But it can prevent a drop in the productive potential of an economy from translating into a drop in spending in the economy: it just has to pump in more money.

Nothing wrong with the argument that it´s “the central bank´s fault”. But I don´t want people to have the impression that the Fed did a much better job. Both did a lousy job, as seen by the similar nominal spending gap in both places. The ECB went nuts in early 2011 when it raised rates. Although it was later reversed it was effectively “too late to say you´re sorry”. After that ‘bold move’ by the ECB the EZ NGDP gap widened more significantly (in certain countries this proved to be ‘deadly’) . In the US, on the contrary, the Fed talk continued to be about monetary stimulation (QE3, thresholds, security purchases, etc.), so the speed of the fall dropped. That´s why the growth graph presented by RA shows the NGDP growth divergence in the two areas for the past couple of years.


But note that NGDP growth in the US is still far below what´s necessary to get spending back to any reasonable trend level path!

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