Keynesian economists have never been able to accept my assertion that the fiscal multiplier is roughly zero because the Fed steers the (nominal) economy. There’s a mental block on their part (or on my part from their perspective) that prevents us from seeing eye to eye on the issue, even if we agree on the need for monetary stimulus.
Everyone seems to agree that the fiscal multiplier is zero when we aren’t at the zero bound. The issue being debated is whether this is also true when rates are near zero. I say yes, most Keynesians say no. See if you think the Fed continues to steer the nominal economy at the zero bound:
Bernanke and his colleagues may be considering more measures to aid growth and improve public understanding of Fed policy, which could be unveiled as soon as their next meeting taking place Jan. 25-26, said Julia Coronado, chief North America economist at BNP Paribas. The Fed reiterated that it expects joblessness to drop “only gradually.”
“They still see downside risks, so I still think they’re tilted toward easing,” said Coronado, a former Fed researcher who is based in New York. She said she expects a new round of asset purchases in the second quarter, or as soon as the January or March meetings should the economy deteriorate faster.
The “recent strength in data” allows Fed officials to “be a little more patient than they otherwise might be,” Coronado said.
Case closed? Unfortunately the answer is no. Both sides are dug in pretty deeply, so it will take more than a snippet from Bloomberg.com to change minds.
Stay tuned for snippet number 248 in the near future.
PS. When I say “everyone seems to agree,” I of course mean everyone but Joe Stiglitz.