You wonder who Krugman has in mind here:
"Yes — if back in 2007 you denied the existence of liquidity traps, that is, denied that the zero lower bound on short-term interest rates places limits on monetary policy, you should long since have acknowledged that you were very, very wrong:
"Yes — if back in 2007 you denied the existence of liquidity traps, that is, denied that the zero lower bound on short-term interest rates places limits on monetary policy, you should long since have acknowledged that you were very, very wrong:
"Since late 2007 the monetary base has risen more than 300 percent, while GDP and consumer prices have risen less than 20 percent. And no, the disconnect is not all due to the 0.25 percent interest rate the Fed pays on reserves."
"You can argue that the Fed could have done more — it could have expanded its balance sheet even further, and/or moved into riskier assets, and/or done more to change expectations. But I don’t see how you can deny that making monetary policy effective has been far harder since we hit the ZLB than it was before, and that this retroactively casts great doubt on Friedman’s claims that the Fed could easily have prevented the Great Depression.."
I'm not sure but does he have Sumner in mind here? I'm thinking of this post in particular where Sumner claims that Mark Sadowski has somehow 'driven another stake through Keynesian economics'-I'd missed the others, though I know that Sumner claims that the sequester has somehow harmed "Keynesian economics' as well as the performance of British economy has somehow harmed it.
Sumner claims that the ZLB he has disproven the ZLB time and again.
"Unfortunately Kimball is too pessimistic about the possibilities of monetary policy, arguing that Fed policy is not effective at the zero bound unless they starts paying negative interest on the medium of account (reserves in Kimball’s proposal.) I won’t discuss why this is wrong here; I’ve done a zillion other posts explaining why the zero bound is not a problem."
However, Krugman's point is that conventional monetary policy is exhausted at the ZLB which is interest rate targeting. Yes, Sumner never stops harping about how interest rates are the wrong indicator for monetary policy. However, we have no actual proof that nonconventional monetary policy works. Here, I'm sure that he thinks the sequester or Britain somehow prove it but I don't see what he sees in these examples.
Sumner as usual takes lots of shot at fiscal policy:
"Miles Kimball has a characteristically interesting post on monetary policy, credit policy, and fiscal policy (which I regard as the good, the bad, and the ugly.) Kimball certainly agrees that fiscal policy is the worst option:
Monetary policy and fiscal policy are not equally good as ways to stimulate the economy. Traditional monetary policy (that is, lowering the short-term interest rate) has two key advantages over traditional fiscal policy:
- It does not add to the national debt
- Because many governments have—however controversially—been willing to let monetary policy be handled by an independent central bank, it is not doomed to be tangled up politics to the same extent that discretionary fiscal policy inevitably gets tangled up in long-running political disputes about taxing and spending.
"Kimball’s exactly right. BTW, I am amazed by how many proponents of fiscal policy don’t understand that it’s symmetrical. Fiscal policy doesn’t mean more government; it means more government during recessions and less government during booms, with no overall change in the average level of government. Anyone who doesn’t even get to that level of understanding, who doesn’t think in terms of policy regimes, is simply not part of the serious conversation."
I'm not sure who these proponents are that aren't aware of the symmetrical point. Of course, you do have the Post Keynesians who think that we should have expansive fiscal policy even during booms-they deny the idea of a long run where growth has a trend it doesn't rise above. However, in arguing for this they're certainly aware the most Keynesians within the Neocclassical school want fiscal policy to only be expansionary during booms and to contract during recessions.
What strikes me is how meager these two advantages are. As for the first one, we have record low interest rates right now despite the acceleration in government debt since the start of the recession. Indeed, it's actually the time to increase debt at such record low interest rates.
As to the second reason, well, I'm not a fan of 'independent central banks' anyway, so this damning case against fiscal stimulus is not so damning. .
Thanks Bill. Good hearing from you again.
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