David Beckworth has a new post that discusses John Taylor’s praise of Robert Hetzel’s new book:
John Taylor appears to be really close to my view of monetary policy over the past decade: it was too loose in the early-to-mid 2000s and was too tight beginning in 2008. And like all Market Monetarists, he believes a big reason for these failures is that the Fed did not follow a systematic, rules-based approach to monetary policy. We agree and would like it to be a nominal GDP level rule. If Taylor can buy Evan P. Koenig’s argument that the Taylor Rule is just a special case of a nominal GDP level target then he is even closer to Market Monetarism than he realizes.
P.S. Buy Robert Hetzel’s book.
I was pleased to see this post for several reasons:
1. I am glad to see Robert Hetzel’s book is finally out and I strongly recommend that all my readers buy a copy. It has outstanding analysis on both the Great Depression and the Great Recession.
2. I was glad to see that John Taylor likes Hetzel’s book. That suggests my views on monetary policy have not diverged from Taylor’s views as much as I had feared. I recently did a post pointing to a 2008 Taylor article that seemed to suggest money was too easy in 2008. In the new John Taylor post he argues the main problem was the discretionary nature of the policy:
In this regard Scott Sumner recently raised some good questions about the part of my analysis on the crisis, where I wrote that one possible unintended consequence of the Fed’s large unanticipated interest rate cut in early 2008 was the decline in the dollar and associated jump in oil and gasoline prices (which were clearly a factor in accelerating the downturn). There were many discretionary moves during this period, but in the part of my analysis Sumner refers to I was discussing interest rates. Recall that on January 22, 2008 the FOMC cut the federal funds rate by 75 basis points in one day, which was most unusual and certainly unanticipated. It was not on an FOMC meeting day, which made it particularly unusual.
The Fed was apparently concerned about stock market turbulence which was later associated with a large trading loss and panic selling incident caused by a single trader Jérôme Kerviel at Société Générale. I was concerned that such a discretionary move tied to stock prices could have adversely affected the Fed’s credibility regarding the dollar and thereby affect oil prices. It was one of many discretionary moves I wrote about, emphasizing that “It is difficult to assess the full impact of this extra sharp easing, and more research is needed” Given that more than four years have transpired, more research is still needed, and I appreciate Scott Sumner raising the issue. In my view the issue is best viewed as only one part of a massive switch away from rules and toward discretion over a number of years, and, as Hetzel’s emphasizes in his book, this is the kind of monetary policy that generally leads to poor economic performance.
I’ve noticed that when I discuss economic policy with other free market types, it’s easier to get agreement on broad policy rules than day-to-day discretionary decisions. Thus I don’t think the 2004-06 Fed policy was quite as excessive as David Beckworth (or John Taylor) does, but David and I both agree that a policy of roughly 5% NGDP growth, level targeting, would have been the way to go. I don’t want to put words into John Taylor’s mouth, but if I had to guess his differences with us market monetarists is probably not quite as big as one might imagine on the basis of a few comments aimed at recent Fed policy. All three of us favor a explicit policy rule that would (de facto) deliver roughly 2% inflation in the long run, with some ability to soften the effects of real shocks to the economy. We all oppose discretion.
Consider a 4.5% growth rate target for NGDP. It is possible for two people to agree on this policy, and even agree on level targeting, and yet still disagree on whether the Fed should do more right now. Conservatives who favored starting the trend line from current levels of NGDP might oppose further stimulus. Someone advocating going about 1/3 of the way back to the pre-2008 trend line (as I do) might favor some additional stimulus. Someone who favors going all the way back to the pre-2008 trend line (i.e. Christina Romer) might favor a lot of additional stimulus. That was also my view in 2009, but I now think going all the way back would be too disruptive.
In the long run, however, all three of these people would favor policies that were rule-bound, and that would deliver the same long run NGDP growth rates. This is why the differences between liberal and conservative macroeconomists seemed to almost vanish during the Great Moderation; both could live with the fairly stable 5% trend NGDP growth
PS. I just got back from a very enjoyable bloggers conference in Kansas City. People often say Kansas City is a surprisingly nice town, but nonetheless I was surprised how nice it was. Unfortunately I am swamped with work, especially taxes. Please leave lots of angry remarks in the comment section of any and all bloggers who support the 16th amendment. The world would be a better place if the Federal government simply withheld what they thought I owed (as other countries do) and didn’t require me to spend a week filling out all sorts of complicated tax forms. My time would be much better spent pressing for a better monetary policy regime.
(Yes, I finally adopted Turbo-Tax last year, but it helped only slightly.)