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Econ 1: Fall 2010: Files for November 1 "Monopolistic Competition" Lecture

Paul Krugman Smackdown Watch: David Beckworth Says QE Is Effective

David Beckworth says that quantitative easing worked remarkably well in the Great Depression:

Macro and Other Market Musings: QE Has Worked Before: My Reply to Paul Krugman: QE has been done before in the United States and it worked incredibly well.  It was initiated in early 1934 when FDR and his treasury officials decided to (1) devalue the value of the dollar relative to gold and (2) quit sterilizing gold inflows.... [T]hat is exactly what was needed, a big permanent shock to inflation expectations that served to stop the deflationary spiral, end the liquidity trap, and allow a recovery in aggregate demand... backed up with significant and permanent increases in the monetary base over time: it went from about $8 billion right before the policy change to about $24 billion by the end of the 1930s.... FDR's QE was a smashing success when it came to shoring up aggregate spending. So those of us folks who want the Fed to increase and stabilize nominal GDP have a good reason to believe it is possible--it happened before.... QE worked  because it (i) it reshaped inflation expectations and (ii) was backed up with meaningful increases in the monetary base.  

The Fed is more than able to do the same today.  It certainly can reshape inflation expectations. Just look at what has happened to them over the last month or so when Fed officials started talking up QE2. The Fed would be far more effective, though, at shaping inflation expectations by explicitly committing to some nominal target.... The Fed, then, needs to (1) announce an explicit nominal [CPI or mnominal GDP] target and (2) say it will do whatever is necessary to hit it...