"After 15 years of deflationary policies the Bank of Japan now clearly is changing course. That should be clear to everybody after today’s policy announcement from the Bank of Japan. I don’t have a lot of writing here other than I will say this is extremely good news. Good for Japan and good for the global economy and what the BoJ is doing is nearly textbook style monetary easing. The only minus is that the BOJ is targeting inflation and not the NGDP level, but anyway I am pretty convinced this will work and work soon."
http://marketmonetarist.com/2013/04/04/15-years-too-late-reviving-japan-the-ecb-should-watch-and-learn/
It will work and work soon. Sounds good. The MMers often don't fully bless new seemingly aggressive monetary actions so this is notable. It certainly better than what Europe is doing.
"After 15 years the BoJ is finally listening to Friedman’s advice and I am sure it will do a lot to revive the Japanese economy. In fact the BoJ is doing more than listening to Milton Friedman. The BoJ is also listening to the Market Monetarist message of using the Chuck Norris Effect by guiding market expectations. Good work Kuroda."
"And finally a message to ECB boss Mario Draghi. If you want to end the euro crisis just copy-paste today’s BoJ statement. You have the same inflation target anyway. It is not really that hard to do."
While there's been some skepticism regarding Shinzo Abe, he seems to be serious after all.
Judging by Lars' comments the MMers do trust him.
He also warned the Keynesians.
More recently, Noah stood by his Abe pessimism while acknowledging some positive developments-a drop in the Yen, a big rally in the NIKKEI and though there's actually been more deflation, a rise in inflation expectations. Just recently he said:
"Yet I still stand by my initial evaluation - Abe is generating a brief fillip of optimism and a sense of economic movement in order to secure an LDP majority in the all-important upcoming upper house election. Securing that majority would allow him to get on with his true all-consuming priority - revising Japan's constitution. After that, his conservative instincts, and the conservative instincts of the Finance Ministry (which is arguably a lot more powerful than the Prime Minister), will take over, as will the worries of the LDP's elderly voters that inflation would destroy their hard-earned life's savings. At that point, talk of radical monetary reform will evaporate, and the recent movements in the yen and the Japanese stock market will begin to slowly unwind."
"This is a pessimistic scenario, but, like Japanese consumers' expectations of deflation, my beliefs about the effectiveness of Japan's Liberal Democratic Party are strongly anchored, and will require more than a bit of tough talk to dislodge.
In any case, it it will take more to please Noah, Abe's certainly won over the MMers now based on Lars' response. We'll see what Sumner has to say but I predict he'll like it; the question is does he offer nay qualifiers? The sharp spike in the NIKKEI may particularly impress him as his whole theory in MM is that policy acts with "long and veritable leads"-rather than Friedman's lags.
The Keynesians, unlike the Monetarists, may not believe this will be enough. However, Abe is on record promising fiscal action as well:
"By itself, the new BOJ policy won’t be enough to regenerate the Japanese economy. It will be interesting to see what else Abe and Co. come up with. When he took office Abe planned to boost Japan’s economy by firing “three arrows“—monetary stimulus, fiscal spending, and regulatory changes and liberalization to increase hiring and investment. That third arrow is the most critical and will be the hardest to fire in a country like Japan where there’s lots of resistance to change."
The MMers have become known primarily for their promotion of NGDP targeting, yet they claim success when monetary policy creates rising stock prices and currency devaluation. Stock prices don't directly factor into NGDP and the wealth effects are empirically very small, if they exist at all. As for currency devaluation, the immediate rise in import prices may more than offset any gains from increased exports (which are in no way guaranteed).
ReplyDeleteBy assumption the MMers believe that increasing the monetary base must raise NGDP. This is why Sumner says the BOJ should continue QE forever (or until NGDP responds). If their assumption is wrong (which I believe it is), than this policy decision will have minimal effect on NGDP over the coming few years (absent accompanying fiscal stimulus). At the current pace, in ~10 years the BOJ may find that it owns a majority share of government bonds, the stock market and real estate. What happens then is anyone's guess...
In conclusion, if MMers want to claim victory already, they must change their mission to either stock or currency valuation targeting. If they want to maintain an NGDP target, than so far the policy (i.e. changing expectations) has been unsuccessful and only NGDP data in the next couple years can verify its predicted results.
Good comment Woj
DeleteIt is quite interesting how quickly the MMers try and claim victory. GDP data isnt assessed daily or weekly since something involving that many transactions is subject to lots of noise.
Even monthly reports are quite tentative. It seems we mostly trust quarterly estimates of GDP, but how often have we seen those revised even down the road? This is something Mike Sankowski discussed in a couple posts months ago when he was showing how it would be nearly impossible to design a tradable NGDP futures contract that couldnt be gamed by Goldman Sachs, which is something that Sumner originally saw as centerpiece to his wish for NGDP targeting (dont know if he still does or if Mike has talked sense into him)
Ultimately, all the MMers really are targeting is the positive noise comjng out of CNBC talking heads. To them as long as Santelli, Baritromo and Cramer are giving everyone smiles and good news all is great with America!
Well the premise of the MMers is that the market can better assess a policy. What the market or the currency are supposed to show is expectations.
DeleteThe NGDP futures market was supposed to directly tract expectations. However, he argues that the equity and bond markets still tell us in real time if a policy is effective via what they tell us about expectations.
ReplyDeleteAs Keynes told us so many years ago, markets primarily inform us about people's expectations of other people's expectations, at least in the short-run. If investors think other investors will be willing to pay higher prices for stocks because of QE than they will buy stocks on expectations or unexpected announcements, regardless of whether the policy influences the underlying cash-flow.
DeleteYes, the premise of MMers is that the above cannot be true and average expectations (depicted by the market) must equal average outcomes (i.e. equilibrium). Unfortunately there is no empirical basis for these assumptions, just faith.
Good point about Keynes and the beauty contest theory of markets.
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