That IMF Speech

I just wanted to post a quick note on that speech by Larry
Summers at the recent IMF conference. Here is the video
on YouTube. It has rightly been praised and created a lot of
debate. I can see letters in response to his FT article talking
about the efficacy of lower real rates and Tobin’s Q in the current
climate. All of this requires more thought, at least from me, but
there is one area that seems hard to argue against. This was the
notion that even a housing boom was not enough to push inflation to
high levels. This is seen in the first chart below from FRED. The
chart also shows the effective Fed funds rate. Summers does seem to
suggest that interest rates were hiked to levels not necessary for
targetting inflation. I presume that Summers will talk more soon
about the policy implications of his thesis, but I would guess that
he would have supported macroprudential policies in the housing
boom rather than increases in the interest rate. 20131224-112532.jpg 20131224-112546.jpg The second chart shows
another price index – the personal consumption expenditures (PCE)
price index. Again, it shows that price inflation was not
excessively high during the housing boom. Anyway, all very interest
stuff and not the last we’ll hear of secular stagnation or economies
getting used to dealing with the zero lower bound.


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