George Selgin appraises QE and Fed policy more generally over the past decade. I think it’s fair to say that he’s not a big fan. The way he frames the discussion might lead some readers to think he sharply disagrees with my views, but this is more a stylistic difference in emphasis. On the core issues we agree:
1. The Fed policy during the Great Recession should not be viewed as a great success. Yes, we did better than Europe, but the recovery was still quite disappointing in an absolute sense.
2. A policy of stable NGDP growth would have been far superior to actual Fed policy.
3. With a better policy (such as NGDP targeting), it’s quite possible that little or no QE would have been needed, and there would have been less Fed intervention into credit markets.
Keep those three points in mind if it seems like he’s less in favor of QE than I am. George also favors a somewhat lower NGDP target than I favor, which leads him to put more weight on policy errors that occurred before 2008. I like the way he ends the post:
Am I suggesting that the Fed could not possibly have done worse? Of course not. Only someone with a severely defective imagination could suppose so. Whatever his shortcomings, Ben Bernanke was far from being an incompetent central banker. In suggesting that we might have done better than Bernanke’s Fed did, I don’t mean that we could have used a better discretion-wielding central banker. I mean that we might have been better off avoiding seat-of-the-pants-style central banking altogether.
I struggle, moreover, to understand why more people don’t take the same view. For if it takes a stunted imagination to suppose that things couldn’t have been worse, it takes a no-less defective one to suppose that we couldn’t possibly improve upon the presently-constituted Fed. Far [from] supplying grounds for celebration, or warranting complacency, the events of the last decade or so ought to make it more evident than ever that our monetary system is very far from being the best of all possible alternatives.
George links to a paper by Yi Wen with the following abstract:
We use a general equilibrium finance model that features explicit government purchases of private debts to shed light on some of the principal working mechanisms of the Federal Reserve’s large-scale asset purchases (LSAP) and their macroeconomic effects. Our model predicts that unless private asset purchases are highly persistent and extremely large (on the order of more than 50% of annual GDP), money injections through LSAP cannot effectively boost aggregate output and employment even if inflation is fully anchored and the real interest rate significantly reduced. Our framework also sheds light on some longstanding financial puzzles and monetary policy questions facing central banks around the world, such as (i) the flight to liquidity under a credit crunch and debt crisis, (ii) the liquidity trap, and (iii) the low inflation puzzle under quantitative easing.
Someone needs to explain to me the phrase “even if inflation is fully anchored.” Obviously if inflation is fully anchored then it’s almost logically impossible for expansionary monetary policy to boost RGDP. (Unless the SRAS was 100% flat, which it isn’t.) So why would an empirical result of this sort be at all interesting?
Obviously I’m missing something. But what?