Monetary Expansion/”Liquidity Injection”

Why is monetary expansion performed at all when it is neutral in the medium run for unemployment and output but generates inflation in the medium run?

Are the short run effects so important for expectations that it is worth it? Olivier Blanchard says among other things: “Today, most economists recognize that there is substantial uncertainty about the effects of policy. They also accept the implication that this uncertainty should lead to less active policy.”

The Central Bank should be independent since politicians would want short sighted increases in output and decreases in unemployment and don’t care so much about the inflation. The Central Banker should be conservative, ie, he or she should care more about inflation than unemployment. The ECB is only concerned with inflation and foreign exchange though in contrast to the Fed.

One reason for the use of monetary policy is to even out fluctuations. However, it seems to be an unfortunate battle between politicians that wants to run the printing press and the conservative independent Central Bank when in reality it should be the business sector that creates job and wealth. Politicians should instead of “creating jobs” secure positive vibrations, lead, as Romney puts it. There is too much talk from government in Sweden to create jobs. However, according to the Eurobarometer, the economy and jobs is what concerns people the most.

Reinfeldt says that he listens, ie, he is the psychologist of the people, rather than the leader of the business community that he should be if he wants to “create jobs”. Obama seems to have the same problem with alienating himself with the business community. Reinfeldt had called ’Svenskt Näringsliv’ a “särintresse” or special interest. The fürer concept is of course a little peculiar in Europe and carries a stigma. The other problem is that it is considered non-solidary with a current account surplus like that of Sweden, a small export oriented country.

When it comes to fiscal tools, decrease of government spending and tax reform rather than tax increase seems to be valuable as in Ireland in the 1980s where Ireland worked itself out of a budget deficit of 13%. This hike also benefitted from an increase in expectations for the future, the leadership variable again. Mario Draghi has now made a move that will aid private banks which could qualify as leadership for the business community and which seems to have created positive expectations for the future—at least temporarily.

The problem of not having a leader of the business community in the West right now is in all probability serious if you don’t trust the Hayekian individuality concept. At least, there does not seem to be a known leader—if the Central Banker has not taken over the helm.

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