Nunc Dimittis: Interest Rate Spreads Narrow
links for 2009-05-06

Cryptic Note to Self: I Will Never Understand Chicago Today...

"But monetary policy can still be very effective: you just have to buy things other than Treasury bonds in your open-market operations..."

Path Finder-269-1

So you grow the money stock: what does that do? Unless your expansionary monetary policy raises short-term interest rates--in which case it is not what I at least think of as expansionary monetary policy--it moves you by the little red line--and it creates a huge excess demand-inflation problem whenever interest rates return to their normal (black) levels as shown by the big black arrow.

By contrast, fiscal policy--or perhaps flow-of-funds policy: fiscal and banking policy--that sops up the flow of savings and raises short-term safe nominal interest rates gets you quickly to the blue arrow--with no long-run monetary-overhang problem to produce a big burst of inflation later.

More to follow...