Teaching_AAU_Reading_Mishkin4.2

Teaching_AAU_Reading_Mishkin4.2 - 112 PART II Financial...

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112 PART II Financial Markets Money and Interest Rates Application The liquidity preference analysis in Figure 11 seems to lead to the conclusion that an increase in the money supply will lower interest rates. This conclu- sion has important policy implications because it has frequently caused politicians to call for a more rapid growth of the money supply in order to drive down interest rates. But is this conclusion that money and interest rates should be negatively related correct? Might there be other important factors left out of the liquid- ity preference analysis in Figure 11 that would reverse this conclusion? We will provide answers to these questions by applying the supply and demand analysis we have used in this chapter to obtain a deeper understanding of the relationship between money and interest rates. An important criticism of the conclusion that a rise in the money supply lowers interest rates has been raised by Milton Friedman, a Nobel laureate in economics. He acknowledges that the liquidity preference analysis is correct and calls the result—that an increase in the money supply ( everything else Following the Financial News The Wall Street Journal Forecasting Survey for 2003 ( continued ) In percent except for dollar vs. yen and dollar vs. euro JULY 2002 SURVEY NEW FORECASTS FOR 2003 3-MO. 10-YR. GDP-b CPI-c $U.S. UNEMPL. 3-MO. 10-YR. GDP-b CPI-c $U.S. $U.S. UNEMPL. TREASURY vs. TREASURY vs. vs. BILL-a NOTE Q1–Q3 YEN BILLS-a NOTE Q1 Q2 Q3 Q4 YEN EURO Dec. Dec. 2002 Nov. Dec. Nov. June June 2003 2003 2003 2003 May June June May Maury Harris, UBS Warburg 2.00 5.00 1.7 2.0 120 5.9 1.60 4.60 2.5 4.5 3.5 3.5 2.3 115 1.05 5.7 William B. Hummer, Wayne Hummer Invest. 2.21 5.05 2.2 2.4 119 5.5 1.31 4.14 2.5 3.1 3.6 3.8 2.1 125 1.05 5.8 R. Shrouds/R. Fry, DuPont Co. 1.80 5.00 2.9 2.1 110 5.8 1.30 4.50 2.5 3.0 3.5 3.5 1.9 128 1.05 6.0 Allen Sinai, Decision Economics Inc. 1.82 4.94 0.8 1.9 123 6.0 1.27 4.17 2.5 2.2 2.9 3.2 2.2 135 1.06 6.5 2.05 5.20 1.8 3.0 115 5.7 1.30 4.40 2.5 3.7 3.8 3.8 1.5 125 0.99 5.8 Gary Thayer, A.G. Edwards 2.20 5.60 2.0 1.8 120 5.5 1.40 4.50 2.5 3.5 3.0 4.5 2.1 119 1.06 5.7 Mark Zandi, Economy.com 2.20 5.25 1.1 2.2 125 6.0 1.70 4.50 2.4 2.7 3.2 3.8 2.2 125 1.00 6.3 R. Berner/D. Greenlaw, Morgan Stanley 2.00 5.30 1.9 2.6 124 5.8 1.50 4.50 2.3 3.8 3.9 3.5 1.9 120 1.05 5.9 David Resler, Nomura Securities International 1.90 5.10 3.2 2.4 120 5.9 1.25 4.25 2.3 3.0 3.5 3.8 1.8 125 1.04 6.0 Edward Leamer, UCLA Anderson Forecast N.A. N.A. N.A. N.A. N.A. N.A. 2.03 4.00 2.2 2.3 2.7 3.2 2.4 N.A. 1.10 6.1 David Rosenberg, Merrill Lynch[d] 2.25 5.25 2.3 2.0 125 5.8 1.20 4.00 2.2 3.3 3.0 3.5 2.4 125 1.07 6.5 Saul Hymans, RSQE, University of Michigan 2.30 5.30 1.9 2.7 122 5.6 1.72 4.03 2.1 4.3 4.2 4.2 2.4 N.A. N.A. 6.1 Nicholas S. Perna, Perna Associates 2.62 5.53 1.3 2.1 122 5.7 1.47 4.53 2.1 3.0 2.9 3.1 2.3 114 1.03 5.5 Richard Yamarone, Argus Research 3.00 5.65 3.1 2.8 128 4.7 1.70 4.60
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Teaching_AAU_Reading_Mishkin4.2 - 112 PART II Financial...

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