Sunday, February 10, 2013

Can a market monetarist answer this question for me?

On facebook a friend links to this article on sequester (a bad thing, IMO), and writes this: "How scary is sequester? Not at all scary, provided monetary accommodation. No mistakes: the sequester should happen."

My response was:
"What worries me about this attitude is that MMers seem to define "monetary accommodation" as "the Fed being successful", and they don't worry enough expectations trap type problems that could cause trouble and that actually present an opportunity for fiscal stimulus to give a helping hand.

So here's a question for you: how could I identify a case where monetary policy IS accommodating but where it fails? What would that look like? If there's not a good answer to that (and I haven't heard one yet), then the MM position reduces to "don't worry - everything will be OK as long as everything is OK", which needless to say is not reassuring. :

You can do this with fiscal policy. Get an estimate of the output gap, get an estimate of the multiplier, and back it out. Any remaining problems are chalked up to the fact that fiscal policy is not a silver bullet. I have no idea what a comparable exercise would be for monetary policy in the context of an MM outlook (you could probably figure something comparable for a New Keynesian view on monetary policy)."
Anybody got a good answer for me?

Romer did something like this for the Depression. I wasn't entirely comfortable with what she did, but she basically took the same approach that we do with fiscal policy (get a gap, a multiplier, and back out the right amount). I don't feel like MMers are even in the ballpark of really engaging this question. They genuinely treat the question as "if we're not doing better then by definition we weren't accommodative".


  1. Yeah. While I"ve tried very, very hard to wrap my brain around MM, I keep coming back to the impression that for them, It's turtles all the way down.

  2. I think that a lot of MM apologists don't have a clear picture of how their proposed mechanisms work. It's all "1) target NGDP 2) ??? 3) profit!" mania for them. Scott Sumner's position, as I gleamed from his blog, is that increases in monetary base could not conceivably fail to translate into the large increases of broad money, and that private banks should be entirely omitted from the consideration. *Sigh*
    David Glasner, on the other hand, holds a position that when interest rates are low, central banks have to try a lot to stimulate an economy, but that is ultimately doable: it is possible the control the amount of currency in circulation. The tools, he thinks, are purchases of securities, which directly add to NGDP, and starting currency wars. Not a strong case in favor of omnipotent monetary policy, I think...

    1. I think it may be doable too... I'm not a pessimist on monetary policy.

      But I do think a lot of peoples' thinking is murky and they are not taking an approach to this that gives primacy to robust policymaking.

    2. But do *you* think clearly on the matter? Banks ultimately make their own decisions on how to extend credit, so any actions of central banks might be feeble. Right now your second sentence looks more like a political statement, your credo as a left-leaning New Keynesian.

      I like David's point about central banks' influence on the forex markets, but it's not a flawless instrument in the world of the floating exchange rates and geopolitics. It seems that, ultimately, there are more ways to induce a recession with the monetary policy than to get a country out of one...

  3. Yes, they have no doubt it can't work and if it doesn't, it was never enough. What they also need to face is they have never done enough, so even if possible, experience says it won't be. They are trying to change this, but it is also only a belief that they can.

  4. Daniel: I quickly reply here:


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