Thursday, 25 February 2010

Does the U.S.central bank understand economics?

Warren Mosler has produced a wealth of evidence that the U.S. central bank the Federal Reserve or “Fed” does not understand how the banking system works. This is just his latest post on the subject.

In addition to the above, the amount of nonsense emanating from the Fed is disturbing, e.g. see here.

And this from a former Fed staffer.

The latest bit of nonsense is from Gauti B. Eggertsson, of the New York Fed.

This paper sets out an idea which is of less than earth shattering significance: he calls it the “paradox of toil”. Basically the argument is that if more people look for work, this may cut wages, which in turn may cut prices, which given the very low interest rates that currently obtain may mean negative interest rates, which in turn may mean a deflationary effect.

Well if crude oil prices decline one could get the same effect. But I’ve no intention of erecting a “paradox of crude oil price cuts”.

There are a hundred and one deflationary and reflationary effects influencing economies all the time. Governments and central banks SHOULD respond to these by taking appropriate counter measures, though how good governments and central banks are at actually doing this is debatable.

When your car is going uphill it will go slower, other things being equal: shock horror. So assuming you want to go at a constant speed, what’s the solution? Er...Um...I’ve got it: depress the accelerator!

1 comment:

  1. You're quite right that Eggertsson's analysis is extremely abstract and ceteris paribus. That should be one of its virtues. No one should take is as DIRECT policy prescription but only as an indication of how one policy variable -- in this case interest rates -- can counter-intuitively affect the outcome of a complex interaction.


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