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Who just posted this right-wing market monetarist interpretation of recent events?

Well, the euro area has had a (slightly) shrinking population aged 15-64 since 2008, while the US has not (although our growth is slowing). How does this affect the picture, and what changes? Europe still does badly, but not by as bad a margin as the raw numbers say: Photo Furthermore, the shortfall doesn’t start right away. Things really go off track only in 2011-2012, when the U.S. recovery continues but Europe slides into a second recession. That’s also when the euro area inflation rate slips definitively below target, where the US rate doesn’t to the same degree: Photo What was happening in 2011-2012? Europe was doing a lot of austerity. But so, actually, was the U.S., between the expiration of stimulus and cutbacks at the state and local level. The big difference was monetary: the ECB’s utterly wrong-headed interest rate hikes in 2011, and its refusal to do its job as lender of last resort as the debt crisis turned into a liquidity panic, even as the Fed was pursuing aggressive easing. Policy improved after that, with Mario Draghi’s “whatever it takes” stabilizing bond markets and a leveling off of austerity. But I think you can make the case that the policy errors of 2011-2012 rocked the euro economy back on its heels, pushed inflation down by around a percentage point, and created enduring weakness — because it’s really hard to recover from deflationary mistakes when you’re in a liquidity trap.

Surprisingly, it was Paul Krugman. I’m thrilled, I just wish he’d given us credit for writing lots of posts almost exactly like this one.

And as far as all you Keynesian commenters who complained when I said we’d done as much austerity as Europe, and the real difference was monetary policy, what do you say now?

And all you Keynesian commenters who insisted the ECB could not have offset fiscal austerity because the eurozone was at the zero bound (it wasn’t) what do you say now?

Is Krugman just as clueless as we are?

PS. People sometimes ask me if I’m depressed that I’ve been unable to get the Fed to do NGDPLT. I try to be polite, but My God! We MMs have succeeded beyond our wildest dreams. An increasing number of famous economists favor NGDP targeting. An increasing number of people acknowledge that monetary policy was actually too tight in 2008. The idea that the Fed offset fiscal austerity in 2013 has increasing support. Japan switched policy in 2013, and their CPI is up about 4% (there’s much more work to be done, but previously they were in deflation.) MMs developed the idea of negative IOR, and then major central banks start adopting it. Even better, asset market responses to negative IOR announcement are consistent with MM predictions and inconsistent with the heterodox views you get in the financial press. We predict 2 rate increases in 2016 when the Fed says there’ll be 4, and now the Fed predicts 2. I could go on and on. And remember, within the economics profession we are a bunch of nobodies. If this is failure, I can’t wait for success.

HT: Michael Darda

PS. Here’s a screen shot of the PP presentation I’ve been giving for years (I believe I originally got the graph from David Beckworth.)

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This entry was posted on April 30th, 2016 and is filed under Eurozone, Praising Krugman. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



