Keynesians tended to assume that the Fed was easing policy between August 2007 and May 2008, because they cut interest rates from 5.25% to 2%. But we’ve already seen that a cut in interest rates is contractionary, ceteris paribus. To claim it’s expansionary, they’d have to show that it was accompanied by an increase in the monetary base. But it was not—the base did not increase—hence the action was contractionary. That’s a really serious mistake.
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TheMoneyIllusion » Nick Rowe on the New Keynesian model world data, they often focus on the interest rate and then ignore what’s going on with the money supply—and that gets them into trouble. Here are three examples of “bad Keynesian analysis”: 1. <span>Keynesians tended to assume that the Fed was easing policy between August 2007 and May 2008, because they cut interest rates from 5.25% to 2%. But we’ve already seen that a cut in interest rates is contractionary, ceteris paribus. To claim it’s expansionary, they’d have to show that it was accompanied by an increase in the monetary base. But it was not—the base did not increase—hence the action was contractionary. That’s a really serious mistake. 2. Between October 1929 and October 1930, the Fed reduced short-term rates from 6.0% to 2.5%. Keynesians (or their equivalent back then) assumed monetary policy was expansionary. But in Summary
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