Some Things I’ve Been Reading…

The Cliff Hangs on the Fed: Why Ben Bernanke Controls the Economy’s Fate
Ramesh Ponnuru and David Beckworth, The Atlantic, December 12 2012
The authors argue that regardless of any contraction associated with the ‘fiscal cliff’ the Federal Reserve has the ability to prevent an impact on the overall level of spending in the economy through monetary easing. They acknowledge that central banks can’t hit their targets precisely, but maintain that they “have the power to come close, which means that fiscal policy cannot have a large effect if they are trying.” They deny that the zero-interest rate bound limits the potential effectiveness of monetary easing.

Models Behaving Badly
Robert Skidelsky, Project Syndicate, December 18, 2012
Skidelsky argues in the opposite direction based on the recent record of missed growth forecasts in the UK and Europe. He concludes that the reason is that monetary authorities underestimated the impact of fiscal austerity and “overestimated the extent to which quantitative easing (QE) by the monetary authorities – that is, printing money – could counterbalance fiscal tightening.” He concludes that while monetary easing “did lower bond yields, the extra money was largely retained within the banking system, and never reached the real economy. This implies that the problem has mainly been a lack of demand for credit – reluctance on the part of businesses and households to borrow on almost any terms in a flat market.”

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