Demanding answers March 15, 2012 at 7:07 am

From The Money Illusion, via Brad DeLong:

In late 2008 the markets were telling us that the Fed was making a tragic mistake by allowing NGDP expectations to plunge. But the economics profession didn’t listen, as they view stock investors as being irrational. Economists were obsessed with the notion that the real problem was banking distress, and that fixing banking would fix the problem. No, the real problem wasn’t banking, the real problem was nominal.

That goes a little far for me – it’s pretty hard to have rising aggregate demand if the credit supply is falling due to a broken banking system (and in particular a broken transmission mechanism) – but there is more than a grain of truth to this.

3 Responses to “Demanding answers”

  1. has there never been an economy able to grow nominal GDP without the use of credit? is endogenous growth always dependent on credit creation? Singapore has been running twin deficits for years and do not need to borrow and create credit yet they have still found a way to grow at a decent clip.

  2. twin surpluses that is :)

  3. s – that is certainly true for the state, but private/corporate credit supply in Singapore is robust. (DBS customer loans are up from 152B SKD Q4 2010 to 195B Q4 2011 for instance – see I have to think at least a priori that credit supply has some role in the growth of NGDP.