Mark Sadowski sent me this link by John Carney:
Sumner, for example, insists on treating quantitative easing as an increase in the monetary base and thinks that must be inflationary. But this is flat-out wrong because it is only looking at one side of the QE ledger—the growth of reserves—while ignoring the other—the shrinking supply of Treasurys.
Again, let’s return to our QE’d investor.
He used to hold a claim on a bunch of securities held by his bank, now he holds a large bank deposit. Sumner and other monetarists insist that he’s more likely to spend this bank deposit, triggering inflation.
But why would he do this? He’s already demonstrated that he doesn’t want to spend the money, that’s why he held the bond to begin with. He wants to preserve his capital for future uses—retirement, bequests to heirs, whatever. The shift from holding a claim on a Treasury to holding a claim on a bank deposit doesn’t change this.
I have two problems here. First, he does not correctly describe my views. I don’t claim that monetary stimulus boosts NGDP and prices because it makes people hold more bank deposits and less bonds. I rely on the hot potato effect for base money. Carney is assuming market monetarists have a Keynesian view of the economy, whereas we actually have a monetarist view. The fact that someone wanted to “preserve their capital” might be important to a Keynesian, but it’s utterly irrelevant to a monetarist. You can preserve your capital without holding lots of currency. It’s not about saving, it’s about hoarding.
More importantly, isn’t Carney claiming that open market purchases in general are not inflationary? That’s a fairly radical claim. I may have misread the post, but that seems to be the implication. In contrast, people usually argue QE is ineffective due to the zero bound problem. Even that is wrong, but for more subtle reasons.
The market clearly reacts to QE as if it is inflationary. I don’t think Carney’s post will cause investors to change their mind.
PS. The reason I argue Carney seems to be making a general argument for the irrelevance of OMOs is that he does assume that QE affects interest rates:
This applies even to highly liquid assets like Treasurys. When the Fed buys securities, it raises the prices of the securities and lowers their yields.
So he’s not relying on a zero bound argument, he’s arguing from a “QE just swaps one asset for another asset” perspective. That’s a radical denial of the effect of any sort of OMO. Or am I missing something?
PPS. Carney also says the following:
When you pay attention to the real world, the situation is much simpler.
Does he think that academic economists don’t understand that open market purchases involve the swapping of reserves for bonds of roughly equal value? Does he understand why we think that matters, even if the bonds were being held for retirement purposes? Yes, pay attention to the real world. But also pay attention to the theoretical world. All real world observation is processed in our brains via theory, AKA “models.” You need the right theories.
Update: Benn Steil sent me the following: