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Wednesday, October 28, 2015

''The 'Most Confused' Critique of the Fed This Year''

Larry Summers provides another "huh?" response to the WSJ editorial by Mike Spence and Kevin Warsh claiming "that overly easy monetary policy reduces business investment. Indeed, they blame the weakness of business investment during the current recovery on the Fed":

I just read the ‘most confused’ critique of the Fed this year: My friends Mike Spence and Kevin Warsh, writing in the Wall Street Journal on Wednesday, have produced what seems to me the single most confused analysis of U.S. monetary policy that I have read this year. Unless I am missing something -- which is certainly possible -- they make a variety of assertions that are usually exposed as fallacy in introductory economics classes. (Brad DeLong has expressed related views).
My problem is not with their policy conclusion, though I do not share their highly negative view of quantitative easing (QE). There are many harshly critical analyses of QE ... which are entirely coherent and consistent with the macroeconomics of the last 50 years. My differences are based on judgments about empirical magnitudes and relative risks -- not questions of basic logic. ...
Perhaps Spence and Warsh are on to something that I am missing. I'm curious whether they can point to any peer reviewed economic research, or indeed any statistical work, that backs up their views. I am certainly open to any new evidence or new argument after all that has happened in recent years that easy money reduces business investment. And there is plenty of room for debate over policy.
For now, though, I would put the Spence-Warsh doctrine that easy money reduces investment in a class of propositions backed by neither logic nor evidence.

    Posted by on Wednesday, October 28, 2015 at 02:46 PM in Economics, Monetary Policy | Permalink  Comments (44)


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