Wednesday, January 15, 2014

Getting the NYU Stern School of Business reschooled

Tom Cooley and Kim Schoenholtz, professors at NYU Stern School of Business missed the secstag memo. They quote Ben in 2002:
The best strategy is to prevent deflation from getting started in the first place. But what can a central bank do if deflation has set in and the policy interest rate has sunk to zero? Bernanke cited four approaches: (1) expand the balance sheet through loans or open-market purchases of assets; (2) lower long-term yields by committing to keep short-term interest rates low or by announcing a cap on government bond yields backed by unlimited willingness to purchase securities; (3) pursue monetary expansion in cooperation with fiscal stimulus; and (4) currency devaluation.
My recent chart showing nominal gdp going down as debt to gdp ratio goes up. Why? Because Ben's strategy causes increased borrowing by government, and somehow more government debt associates with less growth, not more. And what do you know, Ben followed his own strategy, debt to gdp went up and growth went down. Waddya know!

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