Otherwise known as “expectations are all you need to drive the economy”.  From the subculture of money-focussed bloggers I read via Scott Sumner’s blog, this view is very influential: monetary policy is not about putting up this or that rate, or buying this or that bond – it’s about convincing the world about the future path of the economy (NGDP), and if you can do that, you can do anything:

we got this: “Ultimately, with a credible monetary policy framing, the only transmission mechanism is via expectations.” Surreal.

My neighbors down the street bought a house they could not afford back in 2006, because they were worried about being priced out forever. They are now underwater, husband has lost his job, wife’s is looking shaky. They are doing their best to stay current on their mortgage payments, and have cut back on everything else so they can sock away every cent in case both end up unemployed. They are in California, so have about 40% of her earnings taken away by the Govt.

I assure you, Nick, their problem is not one of “framing”. It is one of not having enough money to service their debt out of income.

Instead of futzing about with “expectations” via something as operationally impotent and remote as interbank lending rates, you could focus on simply recapitalizing households. Maybe that is too straightforward.

From Winterspeak, on this fascinating post from Nick Rowe.  Read both.




Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s