Nick Rowe, communicator extraordinaire
As often happens, Nick Rowe has communicated something tricky and difficult to understand in a limpid and revelatory way : ...the main proximate effect of monetary policy on AD is via Tobin's q -- when the price of existing assets rises relative to the marginal cost of producing new assets, firms will move along their MC curves and produce more new assets. Investment increases, in other words, and investment is a component of AD. And when the price of existing assets rises relative to the price of newly-produced consumption goods, both the income (wealth) and substitution effects lead households to increase their demand for newly produced consumption goods, and consumption is also a component of AD. This is such a good explanation of the fundamental mechanism of monetary policy that I virtually had to sit at my computer and applaud. Greg Random responds in the comments: Altering the flow and size of money streams changes the relative valuations of different asset classes, thro...