Tuesday, September 22, 2015

Brad DeLong vs Paul Krugman

They disagree says Krugman, who writes:
Still mulling over the political economy of permahawkery; and, unusually, I have a moderate disagreement with Brad DeLong. Brad has been arguing that demands for tight money are, in fact, contrary to the bankers’ own interests:
It was Milton Friedman who insisted, over and over again, that in any but the shortest of runs high nominal interest rates were not a sign that money was tight–that the central bank had pushed the market interest rate above the Wicksellian natural rate–but rather that money had been and probably was still loose, and that market expectations had adjusted to that.
In this Keynesian bout, I am going to rule in favor of DeLong.

Friedman was right here, high nominal interest rates do not necessarily mean a central bank is  tightening. It has a lot to do with where the rate of price inflation is.

This is what is behind my forecast that interest rates will be raised by the Fed multiple times over coming years. It is not that they want to tighten money supply growth, it will be that they will be battling price inflation that will stay ahead of them becasue they are not going to pull a Volcker and raise rates high enough to kill price inflation. Rates will be raised as price inflation climbs, but not enough to kill the inflation beast.


No comments:

Post a Comment