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Joined: 28 Dec 2005 Posts: 11982
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Posted: Wed Nov 05, 2014 5:39 am Post subject: QE |
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Nick Rowe:
James: take a standard ISLM model, then assume that dI/dY > 1 (there is a strong “accelerator” type effect on investment demand, because few firms want to invest if they expect demand will be weak). The IS curve now slopes upwards. A rightward shift in the LM curve, due to QE, will increase real interest rates, as well as nominal interest rates.
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Steven Kopits:
Nick, you’re arguing that QE was counter-productive, ie, actually harmful?
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Nick Rowe:
Steven: no. Just the opposite. But interest rates are a very poor measure of the effectiveness of monetary policy. A loosening of monetary policy, that raises aggregate demand, can cause both real and nominal interest rates to rise.
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PeakTrader:
QE has had a positive effect on growth, ceteris paribus.
However, in part, because of excess reserves, QE has had a smaller effect.
Chart:
http://research.stlouisfed.org/fred2/series/EXCSRESNS
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It’s easy to confuse the leads and lags of monetary policy with causes.
For example, the Fed will tighten the money supply before growth accelerates.
However, some people will assume, because the Fed tightened the money supply, growth accelerated.
Accommodative monetary policy, including QE, raises inflation expectations, to facilitate nominal growth, and therefore, real growth.
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The saying goes something like the bond market has predicted eight of the last three recessions.
And, it seems, the bond market sends signals to the Fed, including through the yield curve.
Generally, accommodative monetary policy boosted both the bond and stock markets.
However, it seems, excessive banking regulations raised lending standards too high for small business and home loans:
“Small businesses employ roughly half of the private sector labor force and provide more than 40 percent of the private sector’s contribution to gross domestic product. If small businesses have been unable to access the credit they need, they may be underperforming, slowing economic growth and employment.
A combination of reduced creditworthiness, the declining value of homes (a major source of small business loan collateral), and tightened lending standards has reduced the number of small companies able to tap credit markets.”
http://www.clevelandfed.org/research/commentary/2013/2013-10.cfm
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I stated before, without the Fed, there wouldn’t have been any growth at all over the past few years.
Lower interest rates and higher asset prices induce people to spend and borrow, and reduce saving, a lower cost of capital spurs production, refinancing at lower rates increases discretionary income, lower mortgage rates makes buying a home more affordable, 401(k)s and IRAs increase in value, etc.
There are massive multiplier effects throughout the economy.
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Bob Brinker agrees with me:
December, 2012
“It’s only because the Federal Reserve has been active that we have any growth at all in the economy….The Federal Reserve is the only operation in Washington doing its job.
The only person that would criticize Ben Bernanke would be a person who is so clueless about monetary policy and (the) role of the Federal Reserve as to have nothing better than the lowest possible education on the subject of economics….Anybody going after Ben Bernanke is a certified, documented fool….”
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The Fed may have caused the recession, initially, tightening the money supply from 2004-06 and maintaining a restrictive stance too long.
However, the U.S. was on a path to a mild recession thanks to the Bush tax cut in early 2008, which gave the Fed time catching-up easing the money supply, until Lehman failed in September 2008.
The financial crisis was the result of a giant social program in housing Congress believed it didn’t have to pay for.
And, we could’ve had a much stronger recovery from the severe downturn after September 2008.
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