Monetary Policy trumps Fiscal Policy: UK vs. US

The approach to the ‘cliff’. Austerity-UK US_1 As the charts indicate the two economies were progressing smoothly along a stable NGDP growth path, with the UK showing even greater stability. Both fell from the cliff at same time, with the plunge being synchronized, just like the diving pairs from the cliffs in Acapulco! Austerity-UK US_2 The UK has ended up going deeper and that´s usually (think Krugman) put down to ‘austerity’. As the next charts indicate, ‘austerity’ (measured by the fall in government purchases) has been even greater in the US, but note that real growth in the US has remained stable and quite a bit stronger than in the UK. Austerity-UK US_3 Why? One possible answer, illustrated below, is that monetary policy has been ‘easier’ in the US than in the UK, where the monetary policy stance is gauged by the growth in nominal spending (NGDP). Austerity-UK US_4 Hopefully Mark Carney will reverse the spending trend!

Update: Mark Carney hasn´t (yet) lived up to expectations. And the austerity debate rages on.

Update: Scott has a new chapter brought up by Mark Sadowski.

15 thoughts on “Monetary Policy trumps Fiscal Policy: UK vs. US

  1. Just listened to a Bullard speech he’s giving in Germany today. It was a reasonable defence of QE, and made a sensible suggestion to the ECB to do GDP-weighted QE.

    However, he dismissed price level targeting and “its weaker cousin NGDP targeting”. He referred to this speech he gave last year, or rather a set of slides and charts. Did you or any other Market Monetarist respond to his critique of NGDP targeting for failing to incorporate what he called the “Reinhart-Rogoff effect”? It looks really weak, and effectively says you need to ignore the shocks.

    Click to access BullardNotreDame20September2012Final.pdf

  2. In the interests of consistency, a relatively minor nitpick concerning the data.

    “Government purchases” is evidently “Final consumption expenditure of general government” for the U.K. and is “Government consumption expenditures and gross investment” for the U.S.

    The difference is that “Final consumption expenditure of the general government” doesn’t include government investment and “Government consumption expenditures and gross investment” obviously does.

    It’s possible to compute the equivalent of “Government consumption expenditures and gross investment” for the U.K. but it requires doing the seasonal adjustment oneself (I’ve actually done it using the Census X12 feature of Eviews) as Eurostat doesn’t provide seasonally adjusted figures for those components. (I don’t know if the U.K.’s O.N.S. provides seasonally adjusted figures for those components, but I seriously doubt it. And besides, I personally find the U.K.’s O.N.S. to be a giant pain in the derriere.)

    In any case, if one is interested in being consistent, the far simpler thing is to use the Eurostat “Final consumption expenditure of general government” data for the U.S. which shows that fiscal austerity has indeed been greater in the U.S. than in the U.K. (at least by this measure).

  3. Here is an idea for a new blog post:

    Scott Sumner and other Market Monetarists have complained about how “inflation” gets a bad rap with the general public. What Bernanke & Co. want is “more demand” and some inflation is fine because it accompanies higher real growth. But the public doesn’t get that. All they hear is “inflation” which to them means “lower purchasing power.”

    Somebody needs to write a post that explains how Shinzo Abe successfully managed to get the Japanese public–which HATES inflation–to embrace it after all these years of flat prices.

  4. Pingback: Expansionary Monetary Policy as a Stand-Alone Economic Policy « J.uris D.ebtor

  5. Pingback: TheMoneyIllusion » Ironman confirms the market monetarist model

  6. Pingback: Why is the US economy stronger than Europe’s right now? It rhymes with ‘Wernanke’ | AEIdeas

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