Dueling Nobelists on Quantitative Easing

The Wall Street Journal reports that Christopher Pissarides, recipient of the Nobel Prize, has expressed doubts that quantitative easing will help the labor market at all.

If you just looked at the headline you might say "well Pissarides just thinks it's all a matching problem so no wonder he's skeptical of pro-active aggregate demand policy". That's actually not his argument at all, and he raises the same point that I have in my skepticism over monetary policy. Pissarides says: "Quantitative easing is not going to do anything for employment because there is already lots of liquidity". He doesn't come out and say "liquidity trap", but what he says is certainly consistent with it - we're pushing on a string with monetary policy.

Ed Phelps, the 2006 Nobel recipient, disagrees. He says "The U.S. should be allowed to let the dollar weaken as ultimately everyone benefits, the U.S. thanks to exports, while all the others then benefit from the innovation that results from this... Innovation will get going only if exports get going, and that’s the only way to get employment going."

I'm no monetary economist (yet), and I know even less about the international implications of monetary policy. Phelps seems to be relying a lot on exports here, but I'm not sure exports are our biggest problem. Because we're in the very special case of a liquidity trap, I've been skeptical about how big an impact monetary policy can really have, so in that sense I sympathize with Pissarides. I see some advantages, though:

1. Any prospect of creating any inflation helps insofar as sticky wages and debt burdens present a problem.

2. Phelps may overemphasize exports, but weakening the dollar to boost exports can't hurt. Will it be enough? I'm more doubtful about that.

3. Even though there won't be much action on short-term rates, quantitative easing is still likely to effect long-term rates which should do something for investment. Keynes points to this effect on long-term interest rates in his "second place" policy recommendation in his open letter to Roosevelt (the first recommendation is fiscal policy).

So, I'm with Phelps insofar as I think we oughta do it, but I'm with Pissarides insofar as I don't expect miracles. Like I said, though - I'm no expert on QE and I'm curious what others think.