Lunchtime Must-Read: David Beckworth: Abenomics as a Fulfillment of Milton Friedman’s Policy Prescriptions

David Beckworth: Macro and Other Market Musings: Abenomics as a Fulfillment of Milton Friedman’s Policy Prescriptions: “Abenomics is largely a fulfillment of the policy prescriptions…

…he outlined for Japan 13 years ago…. Friedman was calling for large scale asset purchases (LSAPs) long before it was vogue and understood that for the purchases to help the economy there must be a sufficiently large and permanent expansion of the monetary base…. Friedman knew that even though the monetary base and treasuries may be near perfect substitutes in a zero lower bound environment, they would not be in the future. And since investors make decisions on what they think will happen in the future, a monetary base injection that is expected to be permanent and greater than the demand for the it in the future is likely to affect spending today.  The importance of the public believing the monetary base expansion will be permanent can be illustrated by looking back to the early part of the Great Depression…. The key, then, to making monetary policy expansions work in a slump is to create the expectation that at least some part of the monetary base expansion will be permanent. Japan’s first try at quantitative easing in the early-to-mid 2000s failed on this front…. Well that was then and this is now…. It is too early to know for sure whether Abenomics is working, but the evidence so far suggest it is making a difference…. I think Milton Friedman would be happy to see Abenomics if he were alive. Happy Birthday Milton Friedman…. P.S. Whether one increases the monetary base through open market operations or through helicopter drops, the point that the increase remain permanent holds. See Willem Buiter for more this point.