It's Too Late for Monetary Policy
Posted at 9:15 a.m. on Sept. 20, 2012
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.”