Knowing and Making

Another day, another LSE lecture . This one features David Miles from the Bank of England and is chaired by Charles Goodhart. It's on monetary policy and banking fragility. There are two aspects of this problem that are particularly important. The first is transmission mechanisms – an important aspect of monetary macroeconomics. Simple monetary models highlight that there is a relationship between the amount of money in the economy and the amount of economic output (consumption, investment or both). From this we can infer that printing money may increase GDP. Slightly more sophisticated theories give a causal explanation of how this can happen. The central bank prints money and uses it to buy bonds. More money (and fewer bonds) mean that the price of bonds rises – this is simple supply and demand. The price of bonds is the inverse of the interest rate (that is, if a bond pays £50 per year interest and it costs £1000, interest is 5%. If the bond price goes up to £2000, it sti...

When economists say they don't know much, I'm always sympathetic. But when they say we will never know anything, that's going too far. William Easterly presented an idea at the LSE tonight: " We don't know how to solve global poverty - and that's a good thing " (thanks to Andrea James for alerting me to this). Part of his logic is impeccable. He argues that democracy, freedom and self-determination are normative goods - and thus, even if we could solve development problems by imposing top-down, autocratic solutions, we should not. Later, he shows some tentative evidence that authoritarianism doesn't even provide economic benefits - at least there's no convincing evidence for it, and there's some to suggest the opposite. So far so good - it's nice to have an argument against the position that countries need (at least temporarily) an autocratic system to kick-start economic growth. The four examples that are often used to support this ...