Incentives and Monetary Policy

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Paul Krugman takes on his critics:

One quite common statement among the Austrianish horde is something along the lines of â&#128;&#156;Itâ&#128;&#153;s ridiculous to imagine, as Krugman does, that you can create real wealth by printing more pieces of paper.â&#128;&#157;

Well, it may be ridiculous, but itâ&#128;&#153;s also true, under certain conditions â&#128;&#148; namely, when the economy is suffering from inadequate demand. And you donâ&#128;&#153;t have to use highly abstruse reasoning to see this, either; all you need to do is think in terms of some kind of model, not necessarily of the mathematical kind.

In a way, things are even weirder than Krugman suggests. The hard money folks certainly believe in the real-world effects of incentives, and one way of looking at monetary policy is simply as a way of changing incentives. It changes the value of saving vs. spending money. It changes the likely value of real-world investment vs. holding government bonds. It changes inflation expectations, which in turn changes behavior. We can argue about the effect of all thisâ&#128;&#148;and we do!â&#128;&#148;but the proposition that printing money changes incentives, which has an effect on economic behavior and therefore an effect on wealth creation, really shouldn’t be hard to believe intuitively.

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Incentives and Monetary Policy

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