Archive for the 'monetary policy' Category

“Modern Market” Monetarism?

October 17, 2012

by Mario Rizzo

Douglas Irwin, a very fine economist at Dartmouth College, has a very puzzling opinion piece in yesterday’s Financial Times. The root of the puzzle is that Irwin seems to accept what I consider the naïve monetarist view, yet calling it by a new name “market monetarism,” that the effectiveness of monetary policy largely revolves around portfolio adjustment effects that are induced by an increase in real balances. (Isn’t this warmed over Pigou, and 1970s monetarism?)

What seems to be new is the “Divisa monetary indexes” which weight the different components of the monetary aggregates by their monetary services. In principle, this is what Milton Friedman talked about in his course “Money: The Demand Side” in the early 1970s. He said then that he thought it would be a good idea to weight the various components of the money supply by their “degrees of moneyness.” He did wonder, as I recall, if these weights would be stable over time.

Now, by this new measure, monetary policy has been tight. In fact, the money supply is no higher today than in early 2008. Read the rest of this entry »

Who Should Audit the Fed?

July 30, 2012

by Chidem Kurdas

A few days ago the House passed with a veto-proof majority the bill known as “audit the fed” or more plainly as H.R. 459, sponsored by Ron Paul.  If it became law, it would open the Federal Reserve’s policy deliberations and decisions, certain operations and dealings with foreign banks and governments to scrutiny by the Congressional Government Accountability Office. The GAO currently audits the Fed’s financials but not its policy making.

A number of House Democrats supported the bill, though party chieftains are against it.  The critics of the measure, prominently including Fed Chair Ben Bernanke, argue that it will open the way to political interference with monetary policy, which is best conducted on purely economic grounds.

Both sides have a valid point. Read the rest of this entry »

Uncertainty and the Keynesians

July 20, 2012

by Chidem Kurdas

At the current economic juncture two camps offer diametrically opposed macro policy prescriptions. Economists on the Keynesian side such as Joseph Stiglitz and Paul Krugman advocate further monetary easing by the Federal Reserve and massive new federal deficit spending. The opposing camp includes Austrians and monetarists. Among its distinguished members is Allan Meltzer, who in a recent Wall Street Journal op-ed column argues against monetary stimulus and favors reduced government spending.

These correspond to two ways of understanding the sluggishness of the US economy,  explanations based on different time horizons Read the rest of this entry »

Who Said This and When? Do You Agree?

June 29, 2012

by Jerry O’Driscoll

“Why is easy monetary policy such a sin? Because in such an environment, loans are cheap and borrowers can finance every project that they dream up. This results in excesses, and also increases the severity of the recession that inevitably follows when the bubble bursts.”

DeLong, Friedman and Maximal Government

May 3, 2012

by Chidem Kurdas

The case made for minimal government by Milton and Rose Friedman in their 1979 book, Free to Choose, has been debunked,  according to Berkeley professor Brad DeLong.  Basically, he avers that the Friedman program has been tried and failed. As a commentary on Friedman, this is outrageously misleading. But Mr. DeLong  provides a revealing glimpse of the left-liberal mindset. Read the rest of this entry »

Fed in Global Bailout

December 29, 2011

Gerald O’Driscoll explains how the Federal Reserve is bailing out European banks.  Click for his  insightful piece in the Wall Street Journal.

No Way to Escape for the Swiss National Bank

September 15, 2011

by Andreas Hoffmann and Gunther Schnabl

It came as a surprise to many: the Swiss National Bank announced an exchange rate target. Accordingly, the Swiss franc will be held above the level of 1.20 francs per euro. Switzerland gives up a part of its sovereignty, when the ECB makes bad press in buying trash-rated euro area government bonds to support unsustainable national budgets.

But, particularly in an environment of global excess liquidity originating in too-easy monetary policies in major advanced economies, small open economies have incentives to stabilize exchange rates. Read the rest of this entry »

Monetary Nationalism

September 12, 2011

by Jerry O’Driscoll

I recently read Money, Markets and Sovereignty by Benn Steil and Manuel Hinds. I highly recommend it. The jacket blurb accurately summarizes the book’s importance: “Benn Steil and Manuel Hinds offer the most powerful defense of economic liberalism since F. A. Hayek published The Road to Serfdom more than sixty years ago.”

Steil and Hinds focus on the institutional underpinnings of liberalism: the rule of law, globalization (free trade and free movement of capital) and commodity money. Their arguments on all points are powerful. Their argument on money runs against the grain of modern monetary theory. They rely heavily on history to buttress their arguments.

Reading the book motivated me to reread Hayek’s Monetary Nationalism and International Stability, upon which a good part of their monetary analysis is based. Though written in 1937, the book makes a powerful argument against the international monetary arrangements of the last 40 years: the 182 national fiat currencies.

Hayek argues the benefits of national fiat currency are largely illusory, and fiat money introduces problems unknown under the gold standard. For instance, Hayek, and Steil and Hinds explain why short-run capital flows can be destabilizing in a fiat money system, while they are stabilizing in a commodity standard. The two works follow the Misesian strategy of criticizing policies (or institutions) by demonstrating that they produce results different from or even the opposite of those intended by their advocates.

This year’s Cato monetary conference (November 16, 2011) will focus on monetary reform. Instead of a keynote address by a senior Fed official (a hallmark of past conferences), the opening address will be by Ron Paul. Panel I will be “Rethinking the Global Fiat Money System.” Chaired by Mary O’Grady of the Wall Street Journal, the panel will consist of Benn Steil, George Melloan and myself.

Stark quits ECB

September 9, 2011

by Andreas Hoffmann

This is good news for inflationists.

I am shocked that Jürgen Stark quit his job at the European Central Bank. Usually it is a good thing when central bankers quit their job – or at least it does not make a difference. But Jürgen Stark is known as an inflation hawk. Jürgen Stark – like the Mark writes Die Welt.

In my opinion, the main difference between the ECB and the Fed is that the ECB has people like Stark. Unfortunately, there are only a few.

He is opposed to cheap money policies. A while ago, he openly warned of rolling bubbles caused by too low interest rates in the media. Thus, he suggested a timely turn-around in interest rate policy. Recently he voted against further bond purchases of the ECB. More on this recent event can be found here.

Coming shortly after Axel Weber resigned due to his disagreement with Trichet’s policies, Europe’s anti-inflation block is now shattered. Something terrible must be going on at the ECB. I wonder where the ECB is heading?

Is the Fed Independent?

July 26, 2011

by Mario Rizzo

In today’s Wall Street Journal frequent contributor to ThinkMarkets, Jerry O’Driscoll, has an important opinion piece, “Why the Fed Is Not Independent.”

There has been much discussion recently of the importance of “preserving” Fed independence. But is the Fed independent? Independent of what? Jerry concentrates on the link between the Fed’s monetary policy and the Treasury’s fiscal policy.  Consider:

Today, however one parses the term, the Federal Reserve is not now independent. It has voluntarily relinquished the very independence it secured in 1951 by entering into a modern version of the bond support program. That is what the so-called zero interest rate policy amounts to, reinforced by the quantitative easing implemented through QE1 and QE2.

The Fed is committed to holding interest rates at a very low level by purchasing as much Treasury debt as necessary to maintain those interest rates. That is precisely the position the Fed found itself in before the 1951 accord.

Monetary policy once again is not independent of fiscal policy. None of the Fed’s critics can do as much harm to the institution’s independence as it has done to itself.

The whole article is quite interesting. It raises importance questions not only of economics but of politics as well.


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