Market Logic

Is there a monetary solution to a structural problem?

Posted in economics, macroeconomics, monetary econ by mktlogic on March 12, 2011

Arnold Kling does a pretty good job summing up the monetary economics of Scott Sumner and John Taylor here. It’s a choice between more wrong and less wrong. As I comented there,

Sumner’s view seems to be that the damage of the recession is optional. It isn’t.

For the better part of a decade labor, capital and loanable funds were consumed in producing houses that turned out to be worth less than the economic costs of producing them. No monetary rule or NGDP target will ever change the fact that the resources consumed in the housing sector have already been consumed. A NGDP target might well have prolonged the illusion that all of the homebuilding was actually an efficient use of resources and made things worse.

Employment won’t return until people identify new projects to invest in, but that’s not something that can be helped by boosting NGDP either. It just makes it harder for people to identify profitable projects when the monetary policy further distorts relative prices. A Taylor rule approach would be less bad, since it would call for less debasement but an even better approach would be no debasement.