Thursday, September 27, 2012

Liquidity creates bubbles. However, judging the Fed by the ideal of NGDP level targeting instead of the ideal of a Taylor rule, I don't wish the Fed had tightened more during the years of the housing bubble. NGDP was a bit below trend during 2001-2005 and a bit above trend during 2005-2007. (It's been way below trend since 2008. I consider that the Fed's greatest failure since the Great Depression.)

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