Archive for the Category Monetary Policy


Recommended reading

1.  For a guy who has been right about everything, Paul Krugman sure is wrong about an awful lot of things.  Bob Murphy has an excellent new post which digs up lots of Krugman claims that turned out to be somewhat less then correct.

Krugman, armed with his Keynesian model, came into the Great Recession thinking that (a) nominal interest rates can’t go below 0 percent, (b) total government spending reductions in the United States amid a weak recovery would lead to a double dip, and (c) persistently high unemployment would go hand in hand with accelerating price deflation. Because of these macroeconomic views, Krugman recommended aggressive federal deficit spending.

As things turned out, Krugman was wrong on each of the above points: we learned (and this surprised me, too) that nominal rates could go persistently negative, that the US budget “austerity” from 2011 onward coincided with a strengthening recovery, and that consumer prices rose modestly even as unemployment remained high. Krugman was wrong on all of these points, and yet his policy recommendations didn’t budge an iota over the years.

Far from changing his policy conclusions in light of his model’s botched predictions, Krugman kept running victory laps, claiming his model had been “right about everything.” He further speculated that the only explanation for his opponents’ unwillingness to concede defeat was that they were evil or stupid.

Read the whole thing.

2.  Caroline Baum has a very nice post on “never reason from a price change.”  She’s one of the relatively small number of journalists that seem to really get this idea.

The Fed is equally confused when it comes to long-term rates. If you were to ask policy makers if interest rates move pro-cyclically, they would all answer yes. But when rising market rates become a reality, the cries go out that higher rates will damage the economic growth. At the same time, a decline in long rates is automatically assumed to provide economic stimulus. Alas, the expectation that the 100-basis-point decline in 10-year Treasury yields last year would boost investment was mugged by reality.

Getting back to oil prices, economists are still waiting (hoping?) for the oil-price-tax-cut to materialize. Bad weather is getting old as an excuse.

Read the whole thing.  Moving from the sublime to the ridiculous:

3.  John Tamny has a post entitled:

Baltimore’s Plight Reveals the Comical Absurdity of ‘Market Monetarism’

In case you are wondering who John Tamny is, in an earlier post he explained that Bernanke’s inflation targeting idea was unwise, as it would imply that each and every price was stable, not just the overall price level.  Flat panel TV prices could no longer decline.

I’m too busy to do a post mocking all of Tamny’s more recent claims, but he was polite enough to write it in such a way that all I really need to do is quote him.  It’s self-mocking:

‘Market monetarists’ believe that economic growth can be managed by the Federal Reserve.  .  .  .

Market monetarists’ believe the Fed can achieve the alleged nirvana that is planned GDP growth and national income through money supply targets set for the central bank by members of the right who’ve caught the central planning bug.  .  .  .

In fairness to the neo-monetarists, they would all agree that Baltimore has problems that extend well beyond money supply. Still, if money supply planning is the alleged fix for the broad U.S. economy, presumably it would have a positive impact locally.  .  .  .

Specifically, ‘market monetarists’ seek consistent money supply growth, and then when the economy is weak, a bigger increase in the supply of money to boost GDP. . . .

It’s kind of simple. Money supply once again can’t be forced. . . .

It can’t be repeated enough that production is money demand, and is thus the driver of money supply. Money supply shrank in the 1930s not because the Fed decreased it (if it had, alternative sources of money would have quickly revealed themselves), but because the federal government erected massive tax, regulatory, and trade barriers to production. All that, plus FDR’s devaluation of the dollar from 1/20th of an ounce of gold to 1/35th of an ounce in 1933 further put a damper on the very investment that powers new production. It’s forgotten by economists today, but when investors invest they’re tautologically buying future dollar income streams.

If you are looking for a few laughs, the Tamny piece is highly recommended. Indeed I’d call it “tautologically funny.”

PS.  Over at Econlog I have a new post that indirectly addresses some of the confusion in the Tamny post.

HT:  David Beckworth

Update:  Well I may not have gotten the ECB to adopt NGDPLT, but consider this comment from yesterday’s post:

Must be nice to be the sort of rich hedge fund manager that gets this “critical” information before the rest of us.

And from today’s WSJ:

The ECB will post speeches of its board members on its website when they are scheduled to begin, without making them available to journalists ahead of time under embargo as the ECB had done for many years.

The decision, which takes effect immediately, came one day after the public release of comments by executive board member Benoit Coeuré caused a stir in financial markets. Mr. Coeuré  said the ECB would front load bond purchases under its €1.1 trillion ($1.2 trillion) quantitative easing program in May and June to account for a summer lull in bond markets.

HT:  lysseas

What happened to the QE skeptics?

I don’t hear much anymore from people denying that printing money boosts NGDP. Perhaps this story from yesterday morning explains why:

The comments from Benoit Coeure, initially made in private on Monday at a conference attended by one of Britain’s richest hedge fund managers Alan Howard, some of his peers and academics, sent markets into a flurry when they were published on Tuesday.

Anticipating a flood of yet more euros onto the market, the single currency tumbled when the ECB released its Executive Board member’s remarks, sending European shares rising to near multi-year highs.

Coeure said the speed of the recent spike in bond yields, was worrisome and that the ECB could “moderately” increase its buying in May and June so that it did not fall below its monthly buying target. He said, however, that the two were not linked.

Other central bankers chimed in with support for the ECB’s fledgling scheme to buy 60 billion euros a month of chiefly government bonds, a programme known as quantitative easing.

“The Eurosystem is ready to go further if necessary …,” Christian Noyer, who as governor of the Bank of France also sits on the ECB’s decision-making Governing Council, said in Paris.

The excitable market reaction, pulling the euro down below $1.12 and paring back the returns or yields on government bonds, illustrates how critical money printing is to confidence.  (emphasis added)

Two comments:

1.  Yes, the markets are right that money printing is critical.

2.  Must be nice to be the sort of rich hedge fund manager that gets this “critical” information before the rest of us.

Then there are those who are agnostic on the real economy, but insist that QE is blowing up bubbles:

Academics will no doubt be discussing the effectiveness of QE in lifting the real economy for a couple of generations at least, and probably not reaching any definitive conclusions. Perhaps it pulls countries out of a recession, or perhaps they would have eventually started to grow again anyway? One thing we can say for sure, however, is that it boosts asset prices.

In fact, it is already happening. A series of Mario Draghi bubbles are already inflating across the eurozone. Where exactly? Well, Spanish construction is booming, Dublin house prices are soaring, German wages are accelerating, Malta is riding a wave of hot money, and Portuguese equities are among the best performers in the world. For a lucky few investors, QE is already working its magic.

In the 21st century, pundits will be unable to see anything other than recessions and “bubbles.”  There will no longer be periods of stable growth without “bubbles,” like the 1960s.  Of course bubbles don’t actually exist, but low interest rates as far as the eye can see means that asset prices will look bubble-like unless artificially depressed by a tight monetary policy that drives the economy into recession.

By the way, the rest of the article has data that supposedly supports the claims in the quote above, but they aren’t even close to being adequate.  Spanish construction is booming”?  How would we know?  They support that claim by pointing to a recent 12% rise in construction.  They don’t tell you whether that’s from a highly depressed level. Didn’t Spanish construction fall something like 60% or 80% during the Great Eurozone Depression? German wages accelerating?  We are told one German union got a 3.4% wage increase. That’s it. Malta’s property prices are up 10%.  Portuguese stocks are up 25%.  Snippets of information that provide essentially no support for the bubble claims being made.  But when you are sure that QE is blowing up “bubbles”, I guess that’s all you need.  After all, there could not possibly be any rational explanation for Malta’s property prices rising 10%, could there?

Surprise, the Fed again overestimates growth

The first quarter NGDP growth numbers are in, and they show about 0.1% annualized growth.  The Hypermind full year forecast fell from 3.8% to 3.6% on the news.  I doubt if we’ll even hit 3.6%, which would require nearly 4.8% annual growth for the final three quarters of the year.

The Fed seems anxious to raise interest rates this year, but I’m having trouble understanding what “problem” this is supposed to solve.

Overheating?  Expected future overheating?

Or is this urge a sort of atavistic gesture, like an arm or leg that suddenly jerks after being still for too long?  Are they planning to raise rates because . . . well because it’s the job of central banks to move interest rates to and fro?

The new and improved modern Fed says they will be “data driven.”  OK, what do they learn from the fact that the economy is once again underperforming their expectations?


High interest rates are not “ammunition”

This caught my eye:

Unlike these past five major rate hike cycles, today’s Fed will not be moving to fight inflation or cool economic growth. Inflation is running below their target and current U.S. GDP readings are not exactly red hot. What the Fed wants (or needs) to do is raise the target rate in order to have ammunition for the next time our economy stumbles. A well-telegraphed series of small rate increases could allow the Fed to “reload” while having only a minimal to modest impact on overall economic activity. It would be another spectacular tight rope act for the Fed to pull off, but their recent track record suggests it is something possible. One certainty that exists is the fact that the Fed will do no harm to the market or the economy, especially with the next presidential election cycle beginning already.

I guess once people start reasoning from an interest rate change there’s no telling where it will lead.  Of course he has things exactly backwards; if the Fed wants more (conventional) ammunition, it needs to delay raising interest rates to speed up NGDP growth.

The mistake here is that the author assumes the ability to cut rates represents “ammunition.”  In fact, if you insist on thinking in Keynesian terms, then ammunition is represented by a higher Wicksellian equilibrium nominal interest rate, not a higher actual rate.  The farther above zero is the Wicksellian rate, the more ability the Fed has to stimulate using conventional interest rate cuts.  But here’s the problem.  If the Fed raises rates today with a tight money policy then they will be reducing NGDP growth, and hence reducing the Wicksellian equilibrium rate.  They’ll have less ammo.

Now it’s conceivable that the author was suggesting that the Fed could get more ammunition by raising interest rates via a Neo-Fisherian channel (easier money), say by raising the inflation target to 4%.  Sure, that would work, but I sort of doubt that’s what the author had in mind.  Again, a tighter monetary policy gives the Fed less ammo, not more.

PS.  Russ Roberts has a new podcast interviewing me on interest rates.

Update:  The Washington Examiner has a list of 28 “New Voices.”  I was pleased to see my name, and even more pleased to see Matthew Rognlie.  Matt always left extremely thoughtful comments, and I considered him to be one of the rising young stars even before his famous post on the Piketty data issue.  It’s great to see how the internet can give a voice to talented students like Matt (as well as Evan Soltas, Yichuan Wang, etc.)

Update#2:  Ramesh Ponnuru has a very good article on Bernanke’s discussion of NGDP targeting.

Interesting links

Jim Glass sent me a very good piece by Greg Ip of the WSJ:

The U.S. economy has downshifted rather abruptly in the last few months, prompting new discussion within the Federal Reserve about delaying its first interest-rate increase. Yet the growth deceleration should not come as a surprise, because the Fed has already tightened.

True, the Fed’s interest-rate target remains close to zero. But the Fed tightens through its words, not just its actions, and the drumbeat of chatter from the Fed in the last year has made it clear that officials plan to start raising rates sometime this year.

That chatter has made itself felt in stock, bond, and most important foreign exchange markets. The dollar’s sharp rise in the last six months is not due not just to the European Central Bank’s dramatic easing of monetary policy through quantitative easing (QE, the purchase of bonds with newly created money), but to the juxtaposition of the ECB’s action against anticipation that the Fed will soon tighten.

.  .  .

This is a reminder of something investors and Fed officials routinely forget: Markets discount the Fed’s actions long before they actually occur, in ways that are not obvious at the time. We saw that with the 2013 “taper tantrum” that sent mortgage rates up sharply and soon produced a notable slowing in housing and other interest-sensitive parts of economic growth.

The Fed should therefore respond to this in one of two ways. First, the tightening in financial conditions has already done much of the work that its first interest-rate increase was supposed to accomplish. This is a good reason to either delay the start of tightening, tighten more slowly, or both.

Second, if Fed officials feel the tightening in financial conditions is excessive, they should change how they talk. The dovish message of the March Fed meeting arrested the rise in the dollar, and more officials are expressing concern about the tone of recent data.

Some economists think of the stance of monetary policy as the future path of the target rate, relative to the future path of the Wicksellian equilibrium rate.  But it’s easy to lose sight of the fact that changes in the stance of monetary policy generally involve changes in the future path of the Wicksellian rate far more than changes in the future path of the actual rate.

Here’s a good piece by Tim Worstall:

Much as I enjoy seeing people shouting at the EU and the ECB for the near idiot manner in which they have conducted monetary policy in the past few years, for I yield to no one except Scott Sumner in my estimation that their performance has been terrible, I can’t let this from Paul Krugman pass. For he appears to be rewriting economic history on the hoof over this idea of expansionary austerity.

.  .  .

That the ECB and the EU Commission screwed up I’ll accept, even fervently endorse. But that’s not the same as being able to show that expansionary austerity doesn’t work: because the EU and the ECB didn’t actually try it. For the poster child for expansionary austerity is actually my native UK in the 1930s. Yes, it involves reducing the deficit and it can thus be described as austerity. But what is really being done is that austere fiscal policy along with a riproaringly expansionary monetary policy. Rather like, umm, doing QE in fact. What Britain did in the 1930s was to come off the gold standard and devalue the pound by 25% or so. We thus got the expansion through that monetary policy and it worked: two years later we were back above pre-recession levels of output. The other examples of the idea also had significant devaluations of the currency in question. Such a devaluation being an important part of the overall policy.

All of the successful examples of expansionary austerity that I know of involve monetary stimulus.  And that includes the massive $500 billion decline in the US budget deficit between calendar 2012 and 2013, which was accompanied by a speed up in GDP growth, a speed up in job creation, and a speed up in the rate of decline in the unemployment rate.  Of course in early 2013 Paul Krugman thought the austerity would slow the recovery.

In early 2014 Krugman suggested that we would soon get a test of the hypothesis that extended unemployment benefits had raised the unemployment rate, as the benefits were being scaled back.  More recently, he seems to have gone quiet about that test, just as he did after the 2013 test of market monetarism.  The Economist explains why supply-side economics matters, even at the zero bound:

A research paper from the Federal Reserve Bank of Chicago estimates that, if real wage growth had followed its historical relationship with the unemployment rate, by mid-2014 it would have been 3.6 percentage points higher than it actually was. Three big things, though, have held back pay: changes to America’s unemployment-insurance system, the behaviour of firms, and the persistence of labour-market “slack”.

America’s unemployment-insurance system underwent a big change at the end of 2013. Before then, the average American could get 53 weeks’ worth of unemployment benefits; in three states they could get 73 weeks’ worth. Congress then decided to make benefits stingier: the average limit dived to 25 weeks, cutting off 1.3m Americans immediately. With nothing to fall back on, the wage expectations of many unemployed people fell, says Iourii Manovskii of the University of Pennsylvania. Employers in some sectors quickly took advantage of this newly cheap pool of workers. A big chunk of the 3m extra jobs created during 2014 were in poorly paid industries (see chart 3).

And here’s one on Neo-Fisherism in Turkey:

Mr Erdogan claims—against all the evidence and in complete contradiction to orthodox economics—that cutting rates will somehow lower inflation. As a devout Muslim, he may also be uncomfortable with usury; he says a rate of zero is the ideal. And the small businessmen who are loyal AK voters tend to borrow domestically in liras, not abroad in dollars.

If Mr. Erdogan thinks zero is ideal, then he presumably regards Switzerland as having the West’s most Islamic financial system. On the other hand, given the speed at which the Turkish lira is losing value, I wouldn’t look for zero rates in Istanbul anytime soon.