Bernanke, Glasner, and long-term rates

Bernanke’s Continuing Confusion about How Monetary Policy Works by David Glasner

Over my four years of blogging — especially the first two – I have written a number of posts pointing out that the Fed’s articulated rationale for its quantitative easing – the one expressed in quote number 1 above: that quantitative easing would reduce long-term interest rates and stimulate the economy by promoting investment – was largely irrelevant, because the magnitude of the effect would be far too small to have any noticeable macroeconomic effect. 

In making this argument, Bernanke bought into one of the few propositions shared by both Keynes and the Austrians: that monetary policy is effective by operating on long-term interest rates, and that significant investments by business in plant and equipment are responsive to relatively small changes in long-term rates. Keynes, at any rate, had the good sense to realize that long-term investment in plant and equipment is not very responsive to changes in long-term interest rates – a view he had espoused in his Treatise on Money before emphasizing, in the General Theory, expectations about future prices and profitability as the key factor governing investment. Austrians, however, never gave up their theoretical preoccupation with the idea that the entire structural profile of a modern economy is dominated by small changes in the long-term rate of interest.