Starting to think we really do have a nice little natural experiment here. Furiously writing a Thesis update memo and no time to explain, but take a gander. Remember NGDP is set by how much money is being printed and future expectations of how much will be printed. It can be anything-just look at Zimbabwe. NGDP doesn’t “cause” RGDP, but you need NGDP to get RGDP, you need a lot of NGDP when there is a lot of “pent up” RGDP (flat LRAS curve) during a recovery. If the central bank holds back NGDP, RGDP can’t grow because that would require deflation in a world used to 2% inflation, unions and longterm debt contracts denominated in fixed nominal units. The ECB does not care about Finland or Denmark, they are busy fretting about the PIIGS, and balancing between inflation in vastly bigger Germany and recession in hugely bigger France, Spain and Italy. Finland and Denmark are just along for the ride and have to hope Europe wants to go to the same monetary destination as them. If Denmark would break the peg and devalue they would see a big spike in NGDP along with a stronger recovery. Finland is stuck with the Euro-which they deserve for rushing into it. This is not the end of the world but it is causing Finland and Denmark to have unnecessarily slow recoveries, all to remove the exchange rate risk bogyman.
Archive for February, 2011
25/Feb/2011 Comments off