Antonio Fatas and Ilian Mihov on the Global Economy: Update on the difficulty of building counterfactuals

Antonio Fatas and Ilian Mihov on the Global Economy: Update on the difficulty of building counterfactuals.

I am not a big fan of government intervention in financial markets and this post highlights one of the reasons why. Everyone makes projections (forecasts) and these forecasts are almost always inaccurate and subject to future revision. Government intervention is sold on the premise that the government forecasts somehow contain more certainty than private market forecasts.

The stimulus was presented as the "only" answer. Without it unemployment would peak at 9.0% or thereabouts, while with it, unemployment would peak at 8%. Both forecasts were wrong. Fiscal policy takes a long time to work itself into the economy and financial markets and a lot can change during that lag period. Things can get worse, as appears to be the case here, or better without any governmental assistance.

I believe the singular role of government in the financial markets is to ensure the integrity of the markets (something it failed to do over the past decade). I still believe that the economy will recover without governmental assistance and that the long-term result of the stimulus will be higher inflation.