Mike Rosenberg (Bloomberg) notes that, when viewing the policy mix from the perspective of fiscal and financial conditions, we are on the following path, even as there is a large amount of slack in the economy [0]:
Figure 1: Source: Michael Rosenberg, Global Economic and Exchange Rate Outlook (not online).
The withdrawal of fiscal stimulus has been discussed often, but I think the tightening of financial conditions is often overlooked. According to Bloomberg’s financial conditions index (BFCIUS), which is a composite measure based on money market and bond market spreads and equity prices, [1] (p.10) tightening is occurring.
Figure 2: Source: Michael Rosenberg, Global Economic and Exchange Rate Outlook (not online).
Tightening fiscal and monetary policy, when the output gap is still large and negative by most measures, is not an example of counter-cyclical policy. Speaker Boehner’s plan makes no attempt, as far as I can tell, to address any of the issues of job creation and demand creation in the short run. [2] Rather, he argued for a continued move south in the Figure 1 matrix.
This post originally appeared at Econbrowser and is reproduced with permission.
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