by Tyler Cowen
on May 2, 2012 at 2:49 am
Eurozone M3 vs loans to the private sector (source: GS)
From SoberLook, here is more. One possible lesson is that the real enemy of monetary policy is collapsing credit markets, not zero short-term rates per se.
From the looks of things they also diverged in 2002 and that divergence persisted for a number of years without any major problems. What am I not getting?
And again in 2005. We probably see that artifact every 5 years if we go further back in time.
Credit is the channel through which monetary policy affects the economy. If monetary easing no longer generates credit, it is essentially at the boundary of its effectiveness. This would be a major problem in Europe because their problems are nowhere near solved and there is no capacity for fiscal stimulus.
One possible lesson is that the real enemy of monetary policy is collapsing credit markets, not zero short-term rates per se.
Do credit markets collapse due to feedback in the monetary system. If so why do we have such a system?
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