Tuesday, 9 June 2015

David Glasner nails it

For astute readers of Around the Traps ( are there any other?) David Glasner wrote a brilliant article entitled repeat-after-me-inflations-the-cure-not-the-disease.

Whilst he does discuss one of the arguments about whether inflation is likely to rise or not to my mind his best piece is in the part of when he discusses the depression and the US Recovery.

I will quote the main part

"Of course the best evidence for the effectiveness of monetary policy at the zero lower bound was provided three years later, in April 1933, when FDR suspended the gold standard in the US, causing the dollar to depreciate against gold, triggering an immediate rise in US prices (wholesale prices rising 14% from April through July) and the fastest real recovery in US history (industrial output rising by over 50% over the same period). A recent paper by Andrew Jalil and Gisela Rua documents this amazing recovery from the depths of the Great Depression and the crucial role that changing inflation expectations played in stimulating the recovery. They also make a further important point: that by announcing a price level target, FDR both accelerated the recovery and prevented expectations of inflation from increasing without limit. The 1933 episode suggests that a sharp, but limited, increase in the price-level target would generate a faster and more powerful output response than an incremental increase in the inflation target. Unfortunately, after the 2008 downturn we got neither.'

This to my mind shows why the US recovered so fast ( growth rates near double digit between 1932-36) and the Australian recovery was so tepid.see HERE. Remember that fiscal policy was really only contractionary in 1931 which is why in 1932 GDP fell!

We had a greater devaluation than the US . Fiscal policy was not accommodating BUT we did not have an inflation target and this is David's great argument. If we had our recovery could have been more robust particularly if Jalil and Rua's study was replicated here.

Naturally I agree with David. Read the Jalil and Rua paper. It is a revelation.