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2010-09-23

Issues of conventional macroeconomic policy

Comments on Andrew Sheng “US, Japan and EU monetary policy: Monkeying with interest rates”, 22/09/2010, http://www.eastasiaforum.org/2010/09/22/us-japan-and-eu-monetary-policy-monkeying-with-interest-rates/
While Hoenig's frank and realistic assessment of the current dilemma of excessive low interest rates is nice, it is not clear his prescription is a credible and better alternative within the current set of policy tools.

Any monetary policy by changing interest rate will have an effect on inter-temporary allocative efficiency and equity.

However, the current more pressing issue in the US is how to solve the contemporary issue of resources allocation when there is high unemployment as well as under-used capital capacity.

It seems there is virtually no explicit framework to deal with these issues concurrently, in a way that can show what overall the best trade off is.

Leaving that aside, the Japanese experience of lost decade or decades is more terrifying if that were to be repeated in the US.

If one cannot survive now, what is the use to consider tomorrow? Just as Keynes said, in the long run we are all dead.

Economists may need to come up with more credible and effective solutions. This is an efficiency issue for economists!

PS: The Japanese experience, if it becomes more wide spread, indicates the ineffectiveness of current macroeconomic policies in dealing with such a “balance sheet recession” when it occurs and the consequences of conventional macroeconomic policy in preventing it from occurring in the first place.

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