Monday, January 05, 2009

Monetary Policy Is Industrial Policy

John Taylor, most famous for having created the "Taylor rule" attacks the Fed for having abandoned monetary policy and instead embarked on "industrial policy":

"This doesn't really seem like quantitative easing in the sense of finding a growth rate in the money supply...What you are looking at now is really being determined by other considerations. How much should we buy of mortgage-backed securities? How much should we loan to foreign central banks? This is really more like an industrial policy,"

Yet what Taylor fails to realize is that monetary policy has always constituted a form of "industrial policy", even if it hasn't been as direct as now. Monetary policy has always impacted certain industries more than others, with investment good industries being more affected by changes in interest rates than (non-durable) consumer goods industries. Taylor's views stem from the classical fallacy among non-Austrians that somehow monetary policy is "neutral" in its impact on different industries, companies and individuals. In reality though, monetary policy has always had strong redistributive effects as newly created money in the banking sector has ended up in the mortgage sector, similarly to how the Fed pours money into mortgage backed securities now.

The only difference is that the Fed has decided not to use the banks as middle men, and instead is doing it directly, but the impact on the economy is the same.


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