I wrote:
> > it's clear that monetary policy has its limits, since Greenspan
> has >been failing to slow the economy down for months now.
Tom writes:
>The major econometric models predict that a 25 basis point increase in the
>Federal funds rate will decrease the rate of growth of GDP by one-tenth of
>a percent over a two-year period. But most mainstream monetary
>economists will point out that the major econometric models do not
>adequately take into account "expectations"--or, to elaborate in a
>heterodox direction: they do not adequately explain the conventional
>determination of interest rates.
they also miss the accelerator effect, i.e., that a mere slowdown of
aggregate demand can cause a _fall_ in private fixed investment in plant
and equipment.[*] Because most recessions since WW2 have been stabilized by
the government's automatic stabilizers, the accelerator effect doesn't show
up in econometric studies very clearly.
So if the Fed has raised the fed funds [interbank] rate by 125 basis points
-- 1.25 percentage points -- the growth of real GDP should slow by 1/2 of a
percent over a two year period. This in turn can induce the accelerator
effect, especially now that the automatic stabilizers have been weakened
(for example because welfare "entitlement" grants have been replaced by
block grants to the states with a limited number of years of benefits plus
the earned income tax credit, which is tied to employment and because the
old style of agricultural price support has largely gone away).
[*] Just thinking about the dynamics of the economy indicates how absurd it
is to count software expenditure as a form of fixed investment as the US
Department of Commerce currently does.
In a separate missive, Tom referred to the possibility of the Fed simply
giving money away. This assumes away the fact that the Fed is a
state-sponsored cartel of banks, which gives the private banks tremendous
power in deciding policy.
Jim Devine [EMAIL PROTECTED] & http://liberalarts.lmu.edu/~jdevine
