Wednesday, 20 October 2010

Britain and America: Fiscal tightening vs QE2

It is conventional wisdom among economists that monetary policy is precise, predictable and effective, while fiscal policy is the opposite. Yet, as Joseph Stiglitz argued in the FT this week, it is far from evident that this is true. The impact of quantitative easing is anything but predictable. More important, monetary policy has worked, in practice, via credit expansion. It is, as a result, at least partly responsible for the debt crisis of today. Who can now confidently state that reliance on a policy which worked by financing overpriced housing was better than using surplus savings for higher public investment?

My crazy thought: I must raise the question that what is the benchmark to "overpriced" housing (now). Furthermore, QE leave the decision of "asset allocation" to the market, but public investment does not.

Very interesting article.

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