Which market monetarist said this?
If I understand the news coming out of Europe correctly, the new head of the European Central Bank is offering a simple deal: If fiscal policy becomes hawkish, monetary policy will be dovish. In other words, as government spending is cut to put European governments on a sounder financial footing, monetary policy will do its best to ensure that any adverse impact on aggregate demand is kept to a minimum.
That seems a sensible compromise, given all the competing risks. Indeed a similar deal might well make sense for the United States.
My more liberal friends argue, based on Keynesian principles, that we need dovish fiscal policy as well. They often argue for short-run fiscal expansion coupled with long-run fiscal contraction. The problem is that fiscal policymakers cannot bind their future selves. It is hard to make commitments to future fiscal contraction credible, especially as short-run actions expand the budget deficit.
My more conservative friends argue, based on monetarist principles, that a dovish monetary policy risks future inflation. In my view, however, there are bigger risks than inflation just now. They include prolonged high unemployment and meager growth.
Answer: It was a trick question! The quotation was taken from the blog a of famous Keynesian.
Update: Pinch me, I must be dreaming. Here’s another person who is not a market monetarist, responding to the previous quotation:
He wonders why we cannot get this sort of deal in the U.S. He makes the point that I made at dinner with Tim Congdon. The would-be monetary doves on the left believe we are in a liquidity trap, and the would-be monetary doves on the right are frightened of inflation.
I think what this is getting us is the worst possible combination–expansionary fiscal policy and non-stimulative monetary policy. The hawkish monetary policy may limit inflation in the near term (when lower inflation is not necessarily a good thing), but meanwhile the long-term inflationary pressures are building due to the fiscal deficits.
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2. December 2011 at 09:20
Certainly famous and identified as a Keynesian, but really his views don’t seem to have much in common with Krugman. The paper with Weinzierl earlier this year makes it clear that he thinks fiscal policy is never necessary, because AD problems can always be solved by the monetary authority. So you might as well claim him for the Market Monetarists.
2. December 2011 at 09:36
Arnold Kling has been sympathetic for months. I think that Greg Mankiw’s shift is a little more significant.
All good signs. You’re slowly winning.
2. December 2011 at 09:42
Why are you surprised exactly? This is what Keynesians have been saying all along, is it not? Mankiw’s reservations about fiscal policy (which I don’t share) seem to have more to do with worrying that short-term expansionism could get addictive and lead to long-term problems. That doesn’t make much sense to me. Our long term problem is Medicare, and we are not doing fiscal stimulus through the Medicare budget. So I differ with Mankiw in worrying about that.
But on the monetary front, I don’t see why you’re so shocked.
What Keynesian has said between 2008 and now that monetary policy shouldn’t be dovish?
You’ve had disagreements on theory, on details, and even on how to frame the discussion – but you’ve never had Keynesians disputing the point that monetary policy should be dovish (that I’m aware of).
2. December 2011 at 10:02
@Daniel Kuehn–
There have been plenty saying exactly what Arnold Kling referred to above, that monetary policy should be dovish, but we’re in a liquidity trap so it can’t be because it won’t work.
As far as not worrying about fiscal stimulus because of our long-term problem, that doesn’t make much sense to me. A deficit of 8% is a deficit of 8% regardless of whether it’s “through the Medicare budget.”
Your argument, Daniel, is no different from saying that deficits incurred due to war in Iraq are no problem because the war will end (we’re still following Bush’s timetable), and war isn’t our long-term problem, which is Medicare.
2. December 2011 at 10:03
This is the easiest sale in the world to the Tea Party.
The trade is becoming far more explicit.
It RUINS Democrats.
To the Tea Party it won’t even feel like a compromise…
We get serious cuts to long term entitlements supported by the Democrats, the economy is certainly turned around, who cares what the Fed is doing?
Why would Fox News and Drudge cover it? Obama is out of office. Who cares?
There is no reason to couch it to win Democrat support.
The Tea Party is the A power.
The Banksters are the B power.
The Fed just has to line up hard behind the Tea Party and say CUT LONG TERM SPENDING NOW.
No deeper strategy is needed.
2. December 2011 at 10:08
OK let me say it Nightly News Terms..
Newstory 1: “Nancy Pelosi self-immolated on the floor of Congress today as the Federal Employee wages were frozen until 2017, and the retirement age on SS and Medicare were raised to 70 over the next 25 years.”
Newstory 2: “The Fed today announced a round of QE meant to insure we do not experience deflation, they are continuing projecting zero inflation for this year.”
Newstory 3: “Job gains continued today….”
2. December 2011 at 10:19
re: “Your argument, Daniel, is no different from saying that deficits incurred due to war in Iraq are no problem because the war will end (we’re still following Bush’s timetable), and war isn’t our long-term problem, which is Medicare.”
That’s exactly what I’m saying.
If entitlements weren’t a problem, I would not worry about the Iraq war as a long-term fiscal imbalance problem. That isn’t to say, of course, that it isn’t a problem in other senses – even a fiscal problem. But the long-term fiscal problem that Mankiw refers to (that I am concerned about, and that I think a lot of people are concerned about) is an entitlements problem – and arguably also a tax problem. I’ts not an Iraq war problem or an ARRA problem.
2. December 2011 at 10:20
Also –
I noted that there are differences of opinion on the theory and details of monetary policy.
But nothing should surprise Scott about a Keynesian saying “monetary poilcy should be dovish”. Nothing. It’s what they’ve been saying all along.
2. December 2011 at 11:02
yes, let the Fed target nominal income and the politicians decide how to divy it up (in the long run) between the private and public sector spending. I like that model- sounds like a great model to me. Most conservatives jumped on the austerity bandwagon merely to faciliate a smaller goverment (which I am sympathetic to) and vice versa on the left. But in the process they are couching a political goal in bad economics, substantially reducing the credibility of their arguments which eventually backfires (plus, the ends dont justify the means). The Fed’s job though is not to get involved in politics and it irks me even more when they point to the need for fiscal stimulus. The FOMC is fully in control of the reigns, if they would take them, and there is no need to point across the street. If anything, I would have thought the more conservative FOMC members would realize in an era of backlash against big government it behooves them to facilitate that with easier money (and by the way, vice versa during the fiscally expansive Bush era). ok done venting, for now.
2. December 2011 at 12:09
dwb,
it doesn’t work like that.
the level target will be set low enough that it models consistent under 2% inflation… this is the way the Fed codifies the gains of opportunistic disfinlation.
RGDP has been 2.5%, so we’ll target 4% (leaving 1.5% inflation in a normal year).
In that model, Dems lose big time. Any new government spending pumps up RGDP and the Fed raises rates and private sector howls.
It immediately becomes a binary choice between: lower rates for businesses and borrowers or more government spending.
Dems lose that every time.
2. December 2011 at 13:04
Daniel,
“But nothing should surprise Scott about a Keynesian saying “monetary poilcy should be dovish”. Nothing. It’s what they’ve been saying all along.”
Keynesians from Krugman to Koo have been saying that monetary policy at best is ineffective – lack of a credible commitment – and at worst positively harmful. If your position is that monetary policy is ineffective, why pull the levers?
I was positively ‘surprised’ (ie. pleased) by Mankiw’s paper with Weinzierl on discussing stabilization policy and I am happy that his summary of what the ECB and the EU are doing can count on his approval.
2. December 2011 at 13:35
it doesn’t work like that….In that model, Dems lose big time. Any new government spending pumps up RGDP and the Fed raises rates and private sector howls.
It immediately becomes a binary choice between: lower rates for businesses and borrowers or more government spending.
does not work like what? maybe I am not being very articluate but thats pretty much what I am saying. seems to me nominal income targeting makes the fiscal debate about the share of income devoted to government and what to spend it on (at least I think so, and I am pretty sure it does not matter what you think about the fiscal multiplier either, since the FOMC will always be leaning against fiscal policy). It removes the not-so-secret fear that fiscal stimulus increases the size of govt and also removes the chief argument usually made against a balanced budget amendment (which is that deficits are necessary during a downturn). It greatly clarifies in terms of revenue what the govt can and cannot afford without expanding the tax base. It may or may not hurt the Dems as most people are in favor of many govt programs, but at least it focuses the debate squarely on the key issue: size of govt and what to spend it on. IMO
there are about a zillion purely economic reasons to think nominal income targeting is better than inflation targeting, politics aside. But, seems to me a lot of conservatives promote tight money in the hope that in forces shrinkage in the govt or fiscal discipline (or to keep unemployment high into Nov 2012). I am saying, I am surprised that more conservatives don’t jump on the bandwagon because adopting the policy becomes a real forcing function for the fiscal discipline – much more effecticely than tight money based on bad economics which eventually will backfire.
2. December 2011 at 14:05
then we agree, except the Dems do lose and lose big time.
people aren’t in favor of government programs when they have to pay for them, and when this crunch comes, the first one to get it is the public employees.
NGDP -> Gut public employees -> roll back entitlements
That is the argument that carried the Tea Party over the line.
Scott thinks DeKrugman et al don’t get this, I assume they do and that why they have poo-pooed it all along. Matty is too dumb to get it.
I find it interesting.
But we are only now get explicit Fiscal hark Monetary dove trade offs being discussed.
They’ll figure it out.
2. December 2011 at 14:18
William, But I thought New Keynesians had always thought monetary policy was the way to steer the economy. Suddenly in 2008 they changed.
Thanks John.
Daniel, You said;
“Why are you surprised exactly? This is what Keynesians have been saying all along, is it not?”
They sure as hell weren’t saying this in late 2008–that’s exactly why I got into blogging. They said we needed more expansionary fiscal policy. They said monetary policy was out of ammo.
Morgan, The GOP’s chance of winning in 2012 seems to recede further and further every day.
dwb, My views exactly.
2. December 2011 at 17:37
What is koo-koo is expecting tight monetary policy to somehow fix the spendthrift fiscal policy. In fact, tight money makes the fiscal policy worse, as more people are unemployed, etc.
Congress is not going to cut spending. Get used to it. Oh sure, they want to cut–except for defense, Social Security, medicare, USDA, Homeland Security, the VA etc. They can’t even cut honeybee subsidies.
So, we need to put the pedal to the gas petal on monetary policy, and raise taxes, and try, try, try to get Congress to cut spending, except they won’t.
Better a roaring recovery and a too-large federal budget, than perma-recession-deflation (and a too-large federal budget).
Utopia is for utopians. I live in America, and I want a roaring recovery.
2. December 2011 at 21:32
Scott, you’ve already staked your career on Obama winning.
If he loses, you WILL admit in front of god and the Internet, that my final analysis trumps yours. My judo is best.
If I win, you get down in the bottom of the boat and row, your grand plans serve the pleasure of the A power.
If you win, I lament 4 more years of Obama and champion your NGDP approach.
Game on.
2. December 2011 at 21:44
Benji, we aren’t raising taxes we’re going to gut the people who vote for your guys.
3. December 2011 at 03:11
Scott,
I have a question related to the distinction between NK and MM. NK’s want the CB to set the interest rate and have developed models of how to implement that policy.
What I wonder about is what would happen to that interest rate if a CB would announce that it will set the path for nominal income to x% per year.
Would it still evolve in the same fashion as if the CB had set the path of the interest rate(s) to set the path of nominal income? That is, is there one unique path given real income? Or, are there multiple possible paths for the interest rate(s) given the path of real income? And if the latter is the case, what would happen if the size and composition of real income was not give but that it rather was too a function of the path of the interest rate?
My hunch is that targeting nominal income with a new instrument would be an improvement over using an instrument that is used for other purposes as I do not think that there is one unique path for the interest rate for each path of nominal income where (and that) real income is given.
3. December 2011 at 06:27
So Mankiw says that short term fiscal policy can’t be credible because lawmakers can’t commit future lawmakers to fiscal discipline. Of course, Krugman says that monetary policy at ZLB requires commitment of future central bankers to policies they are unlikely to actually enact. I think in general that’s a problem with any level targeting regime.
By the way, hasn’t Chile pretty much solved this problem? As I understand it, their fiscal budgets are based on a cyclical index tied to copper with some of budgeting authority placed with a technocratic commission. It actually seems as though that is the formula Merkozy are groping toward.
3. December 2011 at 06:50
Ben, Yep, a fast recovery is the easiest way to reduce the deficit.
Morgan. I’ll be looking for this comment next November, but probably won’t be able to find it.
Game on.
Martin. I’m not certain. But my hunch is that the interest rate that promotes 5% expected NGDP growth is the same whether you are targeting rates or the base. However, I may be wrong because there is the entire yield curve to consider, which relates to the “indeterminacy problem” in macro, an issue I’ve never really understood very well.
OGT, Yes, I’ve heard very good things about the Chile budget process. In fairness to Mankiw, I think it’s much easier for the central bank to commit than for the the Congress to commit. I believe the Fed’s commitment to hold down rates for two years. I didn’t believe Congress’s commitment to have a super-committee address the tough issues a few months after the August agreement.
3. December 2011 at 10:54
Scott, if I lose, I will become the loudest possible devotee of NGDP done your way to drive the GOP agenda.
And if you lose, you will subjugate yourself before me, and admit to one and all that “spend it all” and use the Fed as a conservative tool trumps your worldview.
I’m fascinated by your weird MA insular world view, I know so many blue collar ex-union Ohioans who despise Obama – its even public school teachers who just voted down Issue 2.
As goes Ohio…
3. December 2011 at 11:12
But even allowing the Fed to exist is a ‘commitment’ by the congress. It takes no more legal hurdles to alter the Fed’s mandate or pack FOMC than it does to add a new spending program. It doesn’t even take many more legal hurdles to cut entitlements than cutting foreign aid. But, of course, luckily there is a bit of taboo on interfering in Fed policy. And even relatively minor changes in institutional arrangements can be a significant influence on policy action if there is some constituency behind it, in the case of Fed being economists and bankers.
I really don’t quite get how it’s considered kosher for different actors in the budgeting process to include economic growth predictions in their ten year budgets. It would make sense to me if they were based on trend growth. If the economy does worse in any particular year it goes into deficit, if it is above trend the budget is in surplus.
3. December 2011 at 20:52
Morgan, What is Issue 2?
OGT, Good points.
3. December 2011 at 22:16
Kasich pulled a Wisconsin on public employees, but he made the mistake of including the cops. Issue 2 overturned the policy.
When gutting public employees, leaving the safety folk alone until later is required. To figure out the line of how much you can gut public employees, it was important to test the broadest swath, no new governors will make the same mistake.
4. December 2011 at 06:00
Morgan, So they lost, and you use that as an example of Tea Party strength?
4. December 2011 at 08:41
NO way, I use it as the outside boundary of what can be done to public employees.
There are limits, just like with entitlements.
This thing is a bomb, and you have to cut the wires in a very specific order to defuse it.
Scott, I think you make the same mistake other make here about what I mean by the Tea Party.
I mean the part of the population that will spend a good swath of years in the 81-99%.
I see this as about 30-35% of the population. They skew heavy R and I, and they all vote, they own stuff, they are in civic clubs like Rotary and PTA, etc.
They are the A power, and whatever they want, in the long run they get.
They are what this country is about.
10. December 2011 at 07:27
Morgan, I agree that the top 20% is much more than 20% of the population, that’s a point many people miss. Of course many of them are public employees.