by Dirk Ehnts, Econoblog101
Paul DeGrauwe has an article on FreeExchange, which is hosted by The Economist:
Since Milton Friedman we have all become monetarists. In order to raise inflation it will be necessary to increase the growth rate of the money stock. This requires that the ECB increase the money base. And to achieve the latter there is only one practical instrument, ie, an open-market purchase of government bonds. There is no other way to raise inflation than through an increase in the money base and a bond-buying programme is the time-tested way to achieve this.
I value Paul DeGrauwe as an economist, but here I would argue that he cannot be serious. Ignoring the comment on Milton Friedman, let us take a look at the relationship between the money base and consumer price inflation in the US, which drove its quantitative easing programme count up to 3:
There, you see? When the monetary base (blue line) goes up, then the inflation rate goes up! If you look at it hard enough and long enough and mumble “theory beats reality” while you do it then the relationship is there! If you would stand back and observe, you would see that the up and down in the monetary base (blue line) from 2010 until basically now did not even correlate with movements of inflation in the same direction. Since 2012, inflation in the US has been stable while the monetary base moved first up and then down. Jumping to the conclusion that a rise in the monetary base causes inflation is something which I find not justified by the data.
And now let me turn to Japan, borrowing from Paul Krugman’s analysis on his own blog:
But I think it’s also important to note that Friedman was all wrong about Japan – and that you can argue that he was also wrong about the Great Depression, for the same reason.
For what Friedman argued, both for Japan in the 1990s and America in the 1930s, was that all the central bank needed to do was more – push out those reserves into the banking system. This would raise the money supply, and a higher money supply would have the usual effects.
But the Bank of Japan tried that – and found that pushing more reserves into the banks didn’t even lead to rapid growth in the money supply, let alone end the problem of deflation. Here’s a Paul Krugman’s analysis on his own blog of growth rates of the monetary base and of M2, Friedman’s preferred monetary aggregate:
