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Thursday, September 29, 2005


Edward Hugh

"He also rejects the excess liquidity argument:"

Hold on a second New Economist, from the quotes you provide, he isn't quite saying this. He isn't denying the existence of substantial liquidity (this among others things is already consacrated in this years annual report of the BIS). What he is saying is that this is an effect of something, not a cause.

The latest IMF WEO has a similar emphasis, when it says it is weak investment demand, not excess savings which is driving the imbalances. This I think is obvious - ie that demand for and supply of savings impact each other producing interest rates, in the same way we get oil prices - the interesting thing is why is demand in *some* European economies and Japan so weak, and why are some developed economies starting to produce so much saving (and others - the US, Spain - not)? That would be the part of the picture which is interesting to get through to.

What I am trying to say perhaps is that it would be more precise to say that he rejects the 'loose monetary policy' argument (Roach) rather than the 'savings glut' argument (Bernanke). This being the case I entirely agree with him. Looking through Roach's latest piece (Friday) in the GEF, the part of his story which I don't get is what he would have expected Greenspan to do. As Macfarlane indicates, tighter monetary policy in the US would only have made the global situation more contractionary, and I don't see how this would have helped anything.

One more point. You're a Taylor rule person, well my feeling is that it's getting increasingly difficult to argue that the significant disinflation we are seeing is due - in Europe and Japan at any rate - to the strict application of a consistent rule. We have very loose monetary and fiscal conditions, and very tame inflation, so the real issue is why?

(Qualification: by tame I don't mean there isn't an oil price rise. The issue is why the pass-through rate is so low. Incidentally, have you noticed, the two economies which are really starting to notice wage-push are Japan and Italy, where the labour force is starting to reduce for demographic reasons?).

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