Some people think easy money is low nominal interest rates. (DeLong)
Some people think easy money is low real interest rates. (DeLong)
Some people think easy money is an inflationary monetary policy; rising commodity prices. (Laffer)
Some people think easy money is a rising non-interest bearing monetary base. (DeLong)
Some people think easy money is a rising interest-bearing monetary base. (DeLong)
Some people think easy money is a rising M2. (Milton Friedman)
Some people think easy money is a depreciation of the currency in the forex market. (Mundell)
Some people think easy money is a rising NGDP growth rate. (Sumner)
What do we make of all this? Brad DeLong seems to think I’m a little bit nuts. But I think the rest of the profession is overlooking something basic. Any definition of easy money is arbitrary, unless it is relative to the policy objective. Let’s start with the fact that these indicators often give off different readings. For instance, in 1929-33 the nominal interest rate and MB indicators said money was easy, M2 and inflation said it was tight, and the real interest rate is ambiguous, because it was hard to measure back then. So I don’t really see what good it does DeLong to cite lots of indicators of easy money, when those indicators are themselves often contradictory:
Well, I would say that not just “modern Keynesians” but a lot of people believed that monetary policy was expansionary in 2008.
They believed so not just because (safe) nominal (and real) interest rates were falling, but because the money supply was expanding. Indeed, since 2007 the Federal Reserve has tripled the monetary base:
Let’s take these one at a time. Here are real interest rates in the last half of 2008, when the economy fell off a cliff.
As you can see, DeLong isn’t just wrong about real rates, he’s about as wrong as a person can be. And these aren’t estimated real rates; they are actual real rates, ex ante, from the TIPS market. Any bank thinking of making a loan knew for a fact that it could earn 4% on risk free government bonds in late 2008, bonds that are far more liquid than bank loans. How’s that for an increase in the opportunity cost of funds used in loans! (Yes, the high real rates only lasted briefly, but that because rates almost always fall when an economy collapses.)
I don’t want to pick on DeLong, because I’ve found that virtually every economist I talk to makes the same error. They all play lip service to the importance of real rates, but obviously only bother to follow nominal rates. So I can’t take very seriously their protestations that they don’t have a flawed monetary policy indicator.
Second, I’ve also noticed that most economists are much more respectful of Friedman’s argument that money was tight in the early 1930s, than my argument that money was tight in 2008. Why is that? Not because in 1932 the base or nominal interest rates were giving different signals than today (they showed easy money in the early 1930s), but rather because M2 was falling in the early 1930s, but not in 2008. Of course most of these economists also rejected the usefulness of M2 after the early 1980s, so it’s not clear why that variable is suddenly important to them. Neither M2 nor NGDP are directly controlled by the Fed. In both cases (it is alleged) the Fed has a hard time increasing them during a “liquidity trap.” So why the lack of respect for NGDP as a policy indicator? There isn’t any logical reason; I’m inclined to think most economists just go with their gut. “Easy money; I know it when I see it.” Actually they don’t; they confuse easy money with easy credit, an entirely unrelated phenomenon.
Lars Svensson showed that under a fiat money regime the Fed should target the forecast, set the monetary base and/or short term rates at a level expected to produce on-target nominal growth in whichever aggregate is being targeting. It makes no sense to talk about the ease or tightness of monetary policy in some absolute sense, as the many indicators listed above often give arbitrary and conflicting indications. All that matters is whether monetary policy is easy or tight relative to the goals of policymakers.
Since the 1980s I’ve advocated a policy aimed at steady growth in NGDP expectations. Brad DeLong has recently made similar recommendations. That’s great. And if that’s the goal, then easy money is a policy expected to exceed the NGDP growth target, and tight money is a policy expected to fall short. And by that criterion, money was extremely tight in late 2008.
One more point. Just how far out of the mainstream am I? Frederic Mishkin has the number one selling money textbook in America, and is a respected NK economist. So what does he think? (pp.609-10):
1. It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates.
2. Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.
3. Monetary policy can be highly effective in reviving a weak economy even if short term rates are already near zero.
Hmmm. Isn’t that Sumnerian economics? What did those “other asset prices” show in 2008:
1. Housing prices fell throughout 2008.
2. Then when NGDP fell in the second half:
a. Commercial RE prices plunged
b. The dollar soared against the euro
c. Commodity prices fell in half
d. TIPS spreads plunged into negative territory
e. Real interest rates soared much higher
f. Equity prices collapsed
I wonder how Mishkin would characterize those “other asset prices?” What were those markets telling us about the stance of monetary policy? And who’s the one teaching textbook economics, me or Brad DeLong? Whose eyes are closed?