One thing that bothers me about the debate over monetary policy is that it is so stubbornly resistant to influence from reality.
I’ve tried over and over again to explain that the traditional mechanisms for stimulating the economy through monetary policy have simply broken down. But let me try again.
In the standard, schoolbook model, increases in the money supply stimulate the economy because they create illusory profits. The demand for goods unexpectedly rises, pushing prices up. Businesses expand to meet this excess demand, hiring new workers, opening shops, and so on. The “extra profits” are invested. Stimulus!
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