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Nick, I agree that this is an example of the Lucas Critique. However, I'd rather call inflation targeting (or NGDP targeting) the alternative policy. If you aren't committed to raising the price level, then an injection of cash might just be hoarded, driving nominal rates closer to zero. The injection must be at least partly expected to be permanent. And this would be equivalent to inflation targeting. But whatever you call it, any alternative monetary regime (exchange rates are another example) will break down the interest rate--inflation correlation.

Scott: agreed. I keep forgetting the Fed doesn't formally inflation target.

"If the Fed had a commitment, not to a series of changes in interest rate, but rather to change the quantity of money however was much is needed to get nominal expenditure back to target, rising credit demand could result in increases in nominal interest rates. And so, if the only way for the Fed to increase nominal expenditure back to a target for the growth path is to lower short term interest rates or keep them low, then the low interest rates were appropriate. However, since the Fed can expand base money by purchasing a variety of financial assets, the lower interest rates are simply an artifact of the Fed's approach to policy."

I would say:

1) Ignores wealth/income inequality

2) Ignores whether the economy is supply constrained or demand constrained

3) Sort of related to 1, buying financial assets from rich people does very little to help those with few financial assets

4) Define change the quantity of money (emphasis money)

5) it seems to me that the fed likes to price inflate with private currency denominated debt (the demand deposits created) which usually requires lower interest rates

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