Finance Basic To Advance Level Knowledge

Imagine you fall into a freezing lake and get hypothermia. You are rushed to the ER and receive good service initially, but your body temperature continues to remain below 98.6 Fahrenheit. The doctor says he is not sure why you are so cold. It is a puzzle to him and everything he thought he knew about body temperatures seems to be wrong. He says not to worry, though, as he turns on the air-conditioner. All should be well soon, he thinks, once the room starts to cool down.  The doctor leaves your room and comes back to check on you after 15 minutes. He finds that your body temperature has dropped even more and that you are shivering. He concludes the room was not cool enough so he dials up the air conditioner even more to really get the cold air blowing.  The doctor leaves and returns after another 15 minutes have passed. You are now unconscious, turning blue, and barely clinging to life. The doctor is now even more baffled about body temperature. Oh well, he concludes...

So a quick update on that grand monetary experiment in Japan known as Abenomics.  Prime Minister Shinzo Abe and his party were returned to power in a decisive October election . This means the Bank of Japan will continue to expand the monetary base, peg the 10-year government bond at 0%, and strive for 2% inflation.  I was an early fan of Abenomics, but have become a bit more skeptical over time. Others, like Noah Smith, are convinced it is working and are glad to see it continue. Mike Bird of the Wall Street Journal is also a fan . They make a reasonable argument that the real side of the economy has benefited from the Bank of Japan's policies.  Maybe so, but what about the nominal side of the economy? Yes, we ultimately care about the real side, but the central bank can only directly affect the nominal economy. Its influence on the real economy is a by-product of this influence. Moreover, getting the nominal side of the economy to rapidly expand is needed ...

I recently made the case that we got a monetary regime change in 2008 that explains the stubbornly low inflation since that time: A monetary regime change has occurred that has lowered the growth rate and growth path of nominal demand. Since the recovery started in 2009Q3, NGDP growth has averaged 3.4 percent. This is below the 5.4 percent of 1990-2007 period (blue line in the figure below) or a 5.7 percent for the entire Great Moderation period of 1985-2007. Macroeconomic policy has dialed back the trend growth of nominal spending by 2 percentage points. That is a relatively large decline. This first development can be seen in the figure below. The figure above also speaks to the second part of this regime change: aggregate demand growth was not allowed to bounce back at a higher growth rate during the recovery like it has in past recessions. Historically, Fed policy allowed aggregate demand to run a bit hot after a recession before settling it back down to its trend growth ra...