Business expectations and QE3

 

"Nobody really knows what will work to get the economy back on course..."
- St Louis Fed President James Bullard.

Gillian Tett in the FT reported that the Duke University CFO survey states that 91 percent of companies will not change their business plans even if there is a 1 percent decline in  rates. Rate changes does not make a difference with growth. It is business cycle expectations.

Investments decisions are not dominated by the level of interest rates as expressed in general Keynesian models, but by the expectations for future economic growth. Keynes discussed the role of investment expectations on the impact of aggregate demand. It is the role of expectations on investment decisions that will guide the effectiveness of monetary policy. Unfortunately, the link between policy and expectations is weak. The only clear monetary role is to have inflationary expectations increase to force investments to be undertaken today.

"decisions to take positive action, the full consequences of which will be spread out over many days to come, are the result of animal spirits -- a spontaneous urge to action rather than inaction, not the weighted average of quantitative benefits multiplied by quantitative probabilities" 

 "If the animal spirits are dimmed, and the spontaneous optimism falters," ..."enterprise fades and dies." 

-Keynes