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January 31, 2015

It's Too Late for Monetary Policy

Eli Dourado notes that in the wake of a recession, monetary stimulus is only useful in the short run, as the economy adjusts to the shock. And unfortunately for the Federal Reserve policymakers launching QE3, the short run seems to have passed.

“My first bit of evidence is corporate profits. They are at an all time high, around two-and-a-half times higher in nominal terms than they were during the late 1990s, our last real boom… A second data point is the duration of unemployment. Around 40 percent of the unemployed have been unemployed for six months or longer… Now, do you mean to tell me that four years into the recession, for people who have been unemployed for six months, a year, or even longer, that their wage demands are sticky? This seems implausible.”

“I would be surprised if we experience a plummeting of unemployment in the next two years down to what we previously thought of as ‘normal’ levels of around 5 percent. Yes, it is good that the Fed is now using the expectations channel, but it did it four to five years too late, and there’s little theory or evidence its failure can be easily reversed.”

  • marcus nunes

    If it´s too late for MP, what should be done? Would there be some symetry between what happened in the early 1980s, in which, after many years of rising inflation monetary policy was successful in bringing it down and now, in which after a few years of doing a bad job and allowing employment to crash and unemployment to soar MP can be successful in reversing it?
    After all, in the 1930s, after several years of getting things wrong, when it “got things right” following FDR´s intervention delinking the dollar from gold and allowing a rapid rise in money supply, the economy bounced back.

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