Coppola Comment

At Pieria, I discuss the inadequacy of monetary policy and the implications of the Fiscal Theory of the Price Level for the conduct of government policy. There needs to be a greater role for fiscal policy, and an end to the fear of debt and inflation that is preventing governments from taking the actions required to restore growth. But this means reversing the prevailing direction of economic thought for the last 30 years: "In the present situation - what Sims calls “fiscal pessimism” - FTPL predicts disinflation. Fiscal pessimism means that people look with horror at rising government debt burdens and future fiscal commitments such as those arising from an ageing population, and think “how on earth are we going to afford this”? They expect much higher taxes in the future and/or serious cuts to spending programmes. If this is also combined with very low interest rates, so they make little or nothing on their growing holdings of government debt, they feel poorer even though...

My first Pieria post about matters discussed at the Lindau Economics Meeting looks at the ever-increasing liquidity of financial assets and the consequences for monetary policy: Several economists at the Lindau meeting were severely critical of central banks' conduct of monetary policy in the light of continuing depression in the US, Japan and much of Europe, and called for greater use of fiscal policy to bring about recovery. Among the most critical was Christopher Sims, who gave a trenchant presentation on “Inflation, Fear of Inflation and Public Debt”. He started by announcing the death of the quantity theory of money, MV=PY. Due to interest on reserves and near-zero interest rates, “money” can no longer be clearly distinguished from other financial assets.... Read on here .

Chatting to a young Indonesian economist over breakfast this morning, I discovered that his impression of Nobel laureates had been radically changed by the Lindau meeting. “I used to think that being a Nobel Laureate meant being a world expert in economics”, he said. “Now I know that's not the case. Nobel Laureates are world experts in their own particular area of research. But they aren't experts in economics as a whole.” The tendency to regard people who are highly qualified and experienced in one area as therefore competent to pronounce upon everything under the sun is a form of what is known as the “ halo effect ”. And it can have absurd consequences. In a press briefing that I attended, a journalist from a well-known news publication asked the American economist Peter Diamond to comment on the Eurozone. The journalist in question is an EU citizen resident in Frankfurt who has been reporting on European matters for several years. She has far more practical knowled...