David Glasner recently began a post with the following observation:
In my previous post, I suggested that Stephen Williamson’s views about the incapacity of monetary policy to reduce unemployment, and his fears that monetary expansion would simply lead to higher inflation and a repeat of the bad old days the 1970s when inflation and unemployment spun out of control, follow from a theoretical presumption that the US economy is now operating (as it almost always does) in the neighborhood of equilibrium. This does not seem right to me, but it is the sort of deep theoretical assumption (e.g., like the rationality of economic agents) that is not subject to direct empirical testing. It is part of what the philosopher Imre Lakatos called the hard core of a (in this case Williamson’s) scientific research program.
I’m going to stay away from the “equilibrium” dispute, mostly because I don’t know what people mean by the term, and also because I think many of these debates are merely about semantics, of no practical importance. But the question of whether monetary policy can reduce unemployment is of great practical importance, and also incredibly easy to test.
If we had any serious interest in finding out the impact of monetary policy on real variables, we’d have the Federal government create NGDP and RGDP futures markets, and subsidize trading at a high enough level to create a deep and highly liquid market. Then we’d watch NGDP and RGDP futures contract prices rise in response to new information on QE1, QE2, and QE3. Because skeptics about the ability of monetary policy to lower unemployment are usually the same people who believe markets are efficient, we’d have that debate resolved very quickly and we could move on to more important things, like whether NGDP targeting or inflation targeting are superior. (I think NGDP targeting is better, even if nominal shocks don’t impact real output.)
Instead we have an FOMC made of up people who agree with Williamson, and others who disagree. And that committee makes decisions that move global real equity prices by TRILLIONS of dollars in a single day. And they do so in complete ignorance of the answer to Glasner’s question, even though a few MILLION dollars spent on a prediction market (Robin Hanson could design it) would quickly answer this question, and allow for much more effective monetary policy.