Innocent Frauds Meet Goodhart’s Law in Monetary Policy

Abstract (Via Bezemer & Gardiner)

This paper discusses recent UK monetary policies as instances of John Kenneth Galbraith’s “innocent fraud,” including the idea that money is a thing rather than a relationship, the fallacy of composition (i.e., that what is possible for one bank is possible for all banks), and the belief that the money supply can be controlled by reserves management. The origins of the idea ofquantitative easing (QE), and its defensewhen it was applied in Britain, are analyzed throughthis lens. An empirical analysis of the effect of reserves on lending is conducted; we do not findevidence that QE “worked,” either by a direct effect on money spending, or through an equitymarket effect. These findings are placed in a historical context in a comparison with earlier money control experiments in the UK.”

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15. October 2010 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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