The Threat of QE2

From my latest article for adamsmith.org:

There is a plausible free market argument to say that under certain institutional conditions (such as competitive banks and no moral hazard), increases in the money supply to offset changes in the demand for money would avoid adjustments having to take place through the notoriously ‘sticky’ real economy. In the same way that inflation creates real effects, so does a monetary deflation, and these effects are neither desirable nor necessary. However, whether this theoretical possibility can be acted upon is another matter. Even if central bankers had the benevolence to try to replicate markets, they most certainly do not possess the omniscience. Expecting such economists to comment on the ‘appropriate’ level of monetary expansion misunderstands the whole point.

1 Comment

  • Lee Kelly says:

    That’s a very good article. Although I support QE2, I actually recognize all the concerns you raise. Ultimately, this is a disagreement that we shouldn’t even be having, because nobody should have to decide how best to centrally plan the monetary order. I think we can at least agree about that!

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