On a recent post by Scott Sumner that points out an article in the Financial Times regarding the tightening actions of the European Central Bank in 2011 and sub-3% growth in NGDP since the 2008 crisis that has slowed growth in the EZ to less than a crawl, a topic of conversation erupted in the comments section regarding the use of interest rates in a discussions about monetary policy being approached in a selective way.
Here’s the “offending” quote from the FT in Sumner’s post:
Europe is an unhappy exception. Despite German misgivings, low interest rates are no evidence that money is too loose: nominal GDP growth stutters along at less than 3 per cent, a clear sign that the stance is much too tight. In recent years the ECB twice made the mistake of raising rates too soon, and thereby punished Europe with a deeper recession and a worse fiscal crisis. If its president Mario Draghi cannot ease policy further, the consequences will be just as serious.
I am not a pro at discussing interest rates. So I generally avoid it. But when Bob Murphy criticized Sumner for a double standard in talking about interest rates he said:
All I’m pointing out is that Scott gets so frustrated at people for using a shortcut that he and his buddies are allowed to use. I know Scott’s objections, and I still think it is perfectly sensible to say Bernanke engaged in outrageously easy money. One indicator of that is the collapse in nominal and real interest rates.
He has a point. It isn’t entirely clear to me that raising funds rates had anything to do with tightening. We don’t really know if that was the ONLY thing that happened, though I can guess that real interest rates were probably negative at the time which tightened credit conditions even farther – in addition to any net negative to the euro money supply vs. demand that is likely to have occurred.
A trip to Marcus Nunes blog to have a look at his graphs for the euro zone shows that NGDP and inflation took a dive (deeper into the abyss) after the rate hikes, and so it can be reasonably assumed that the rate hikes had negative impacts on expectations, and would, in and of themselves, be enough to impact monetary aggregates and cause a nominal shock of X magnitude. Though, I suspect that wasn’t the ONLY thing that happened, and something was also done to the monetary aggregates as well because the nominal impact was large.
But I don’t agree with the second part of the Murphy statement, believing it sensible to say that the Bernanke Fed engaged in outrageously easy money, simply because inflation and NGDP also collapsed and unemployment soared throughout 2009, which wouldn’t happen if “easy money” were the case.
So while Murphy apparently has a problem identifying the context in which various interest rate movements occur, he is right about the short cut. The FT should be given a slap on the wrist for confusing interest rates with monetary policy.