1930s Watch: Does Monetary Policy Matter?
Friedman and Schwartz via Romer and Romer in “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter”, quote a Fed official from the 1930s:
“The consequences of … an economic debauch are inevitable. We are now suffering them. Can they be corrected or removed by cheap money? We do not believe that they can. … there is no short cut or panacea for the rectification of existing conditions.”
It’s a good thing we learned from the 1930s! Oh, wait. Here is what economists are saying today:
Discussion of monetary policy is tending to focus on what might aid recovery – but it is unclear that monetary policy alone (as traditionally understood) can do very much to resolve our present problems. … There is no easy way out.
However there is no monetary magic bullet – against a back drop of fiscal austerity and a damaged financial system it is highly questionable that monetary policy alone can secure a recovery
The ability of monetary policy to boost demand in the current environment seems highly limited.
However, we should not delude [our]self that changing the [monetary policy] remit alone will be a panacea for the UK’s macroeconomic problems.
Happy new year. Normal blogging service will be resumed shortly.