Knowing and Making

...and why the Bank of England and Fed are right to have done so already. I'm not talking about whether the European Central Bank should directly buy eurozone government bonds. This causes a moral hazard problem - it might encourage governments to be profligate and reduce incentives for structural reform. It's, at the very least, debatable. I'm talking about a more general question: why should central banks print money in a recession? This post won't have much new to say to macroeconomists, but it attempts to address a concern of many non-economists - won't printing money just cause more inflation? First, let's run a thought experiment. Imagine that your national government has decided that profligate use of fossil fuels is a problem. Probably because of the risk of climate change. Instead of using a carbon tax, the government decides to restrict the supply of oil coming into the country. It could allow more oil in if necessary - in fact it has a large res...

Here are my unedited notes from David Miles' talk on monetary policy and banking fragility tonight. This may not be of much sense or interest to everyone, so feel free to skip it if you're not into this topic. [ Here is the somewhat more coherent post I wrote before the talk] Miles – recently wrote a paper about the benefits (and costs) of higher bank capital. LSE is intellectual home of MPC in many ways. Links between monetary policy and financial stability: strong and significant Compared to pre-recession trend in 2007, this recession is almost as bad as 1929, and on current projections will be WORSE from 2012 onwards. Changes in banking sector since previous eras – more gross debt (now being reduced), more fiscal compensation (mostly automatic stabilisers), much higher bank leverage. There would have had to be a rebalancing of some kind, but the rebalancing is now happening in the context of a financial crisis. One challenge: policy compensations for imbalances (VA...