If financial markets were perfect, quantitative easing would have no effect on aggregate demand. But if financial markets were perfect, we wouldn't have the financial crisis, and so wouldn't need quantitative easing.

Maybe it isn't the return of Monetarism. Or rather, it isn't the return of only Monetarism. Maybe it's the return of Monetarism vs. Keynesianism, 1960's style, applied to unorthodox monetary policy.

It was good to see Paul Krugman's response to my previous post. We agree more than we disagree, I think. We need to move outside the Neo-Wicksellian perspective if we want to look at monetary policy where short-term interest rates are already at zero. You can't use a model which contains i and does not […]

As interest rates approach zero, and central banks look at "unorthodox" monetary policies, the Neo-Wicksellian perspective on monetary policy has switched to a blank screen. We are witnessing the return of Monetarism. That's the main reason why economists find it hard to think about unorthodox monetary policies. The dominant Neo-Wicksellian paradigm which fills our heads […]

Here is a very simple model of interest rates, debt, asset prices, and recession. It seems to fit the facts of the last few years reasonably well. There are two types of people: the A's and the B's. The A's have normal interest-elastic savings and investment functions. They save less and invest more if the […]