Morning Must-Read: Nick Rowe: Insufficient Demand vs?? Uncertainty

**Nick RoweInsufficient Demand vs?? Uncertainty: “Let’s assume that increased political uncertainty…

…caused a reduction in willingness to ‘hire, lend, or invest’…. The sign is right, but I don’t know about the magnitude. A monetarist would say that would increase the demand for money, and that would cause a recession, unless the central bank took sufficient offsetting action. A New Keynesian/Neo Wicksellian would say that would reduce the natural rate of interest, and that would cause a recession, unless the central bank took sufficient offsetting action…. It’s not just an either/or thing. Nor is it even a bit-of-one-plus-bit-of-the-other thing. Increased political uncertainty can cause a recession via its effect on demand. Unless monetary policy responds appropriately. (And that, of course, would mean targeting NGDP, because inflation targeting doesn’t work when supply-side shocks cause adverse shifts in the Short Run Phillips Curve.)