Friday, October 10, 2014

I'm gonna agree with Milton Friedman on this...

From JSTOR's Friedman on the Lag in Effect of Monetary Policy by J. M. Culbertson:

I'm thinkin', like when you make the water hotter, in the shower, and nothing happens, so you turn it up more, and all of a sudden it's too hot. But whether it gets too hot or not depends on other things, too: Did the water heater just finish a duty cycle, or is it almost ready to start?

I think we can relate the size of the lag to the pace of new credit use, or in particular, to the size of new credit use relative to the size of something -- GDP, or base money, or base plus Federal deficit spending, something. I don't need to resolve this immediately.

I do think we can predict can calculate approximately the relative lag between a change in base-money growth and a corresponding change in inflation. Look, I'm not making any promises. But this is what I want to explore.

Wouldn't it be nice to have a better idea how "lags" work?

1 comment:

Jazzbumpa said...

I think it would be nice to have a better idea how money worked.

I think Friedman also talked about lags being long and variable. That might be valid, or it might be a cover up for the lack of a true data fit.

At any rate, he's talking 16 to 30 months, not 7 years.