There's a problem with the transmission.... In my last post , I pointed out that QE does not work when the transmission mechanism for monetary policy is impaired because of a damaged and risk-averse financial sector. This caused some confusion among those who think that throwing money at banks automatically makes them lend, so I attempted to explain it on twitter. Predictably, I ended up in an extended discussion first with David Beckworth and then with Andrew Lilico, in the course of which it became clear - to me, at any rate - that not only does QE fail when damaged banks aren't lending normally, but it actually impairs the transmission mechanism itself.
This might explain why QE seems to become less effective the more of it you do. It's like hard water. Bank reserves never leave the banking system. It should be apparent from this that the monetary base RESPONDS TO lending demand. Implicit in this post is the idea (as spelled out in the Vox link above) that the traditional "money multiplier" does not exist.
THE GOLD STANDARD AND THE ORIGINS OF THE MODERN INTERNATIONAL MONETARY SYSTEM. Target2 Redux_CEPR 2 _3. Currencies: The weak shall inherit the earth. Can the Fed create demand. The Recovery and Monetary Policy. Remarks at the National Association for Business Economics Annual Meeting, New York City As prepared for delivery Good morning. It is a pleasure to have the opportunity to speak at this NABE (National Association for Business Economics) conference today. Having spent more than 20 years as a business economist working in the private sector before joining the Federal Reserve Bank of New York in 2007, I feel right at home here today. My remarks will focus on the economic outlook. But more seriously, despite the difficulties in making accurate forecasts, we still need to understand as best we can why the economy is performing the way it is, what that implies about the economic outlook, and, how policymakers can respond to generate better outcomes.
My attention today will be on three important questions: Why has the U.S. recovery been so sluggish and consistently weaker than expected? Not only has growth been slow, it has also been disappointing relative to the forecasters' expectations.