PS: The Riksbank is right
I got a couple of emails asking me whether I agreed or disagreed with the passage from the Riksbank’s philosophy of money that I quoted yesterday. I agree. I guess that makes me a tough customer too—a hard-money Marxist, you might say.
That statement not only affirms the neutrality of money (the money supply can’t change growth in the long run), but it also implies that monetary policy can help make up for demand shortfalls in the short run.
So if you agree with the Riksbank’s statement, you would support monetary stimulus to return to full employment in the short run. You would only be a hard money type if you disagreed with the statement.
One of the problems of the Riksbank’s approach, as in virtually all discussion on monetary policy analysis is the distribution of liquidity in the economy in termos of:
* territories (some states/cities are more liquid than others)
* size of firms (corporations are drowning in cash and small businesses are desperate for it)
* size of banks (imagine a QE3 but only destined directly for community banks, credit unions and the like)
* sectors of the economy (some sectors are more import-prone than others)
Perhaps it’s time for central banks to think about *targeted* expansionary policies that could help fulfill the role of fiscal policy.