Who is impersonating Robert Hall?

When I started blogging Robert Hall was one of my heroes.  In this post I quote Hall discussing negative IOR and pointing out that there is no basis for the claim that the Fed is out of ammunition when rates fall to zero.  He certainly didn’t buy all that “liquidity trap” defeatism that was circulating in 2009.

A recent poll of 38 economists showed that precisely one disagreed with the following statement:

The persistent deflation in Japan since 1997 could have been avoided had the Bank of Japan followed different monetary policies.

And who was that unreconstructed, old-fashioned Keynesian?  Who was the economist who provided this explanation for his disagreement with the claim that the BOJ could have prevented deflation?

Central banks lose control of the price level at the zero lower bound, when their reserves become close substitutes for government debt.

Apparently Robert Hall.  I’m totally mystified.  Why couldn’t the BOJ simply depreciate the yen?  I don’t get it, but perhaps someone can explain why Hall shifted from a sensible view of monetary policy to a view that is completely contradicted by theory, logic and experience.  No fiat money central bank in all of world history has ever tried to inflate and fail.  So why is Hall worried about liquidity traps in Japan?

HT:  Marcus Nunes, who points out that Hall advocated NGDP targeting in the 1990s.

PS.  I guess I should be glad that only one out of 38 economists thought the BOJ was blameless.  But that makes me wonder why more economists didn’t demand additional Fed stimulus in late 2008 and 2009.  Where were they?

PPS.  Of course this post is half joking—he’s still one of my heroes.


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20 Responses to “Who is impersonating Robert Hall?”

  1. Gravatar of RIP, ZLB « It Don't Mean Much, These Seats are Cheap. RIP, ZLB « It Don't Mean Much, These Seats are Cheap.
    3. February 2013 at 19:51

    [...] Scott Sumner and Marcus Nunes have more on Robert Hall. Like this:LikeBe the first to like this. [...]

  2. Gravatar of Saturos Saturos
    3. February 2013 at 22:30

    Body Snatchers Redux.

  3. Gravatar of Geoff Geoff
    3. February 2013 at 23:49

    Maybe Hall is alluding to the non-linearity problem that accompanies high debt to tax base ratios.

    Japan’s debt is so high (fiscal problem) that more inflation may lead to Japan’s interest costs rising above their revenues. The likelihood of default increases with inflation.

    Imagine you had the power to print as many “Dr. Sumner dollars” as you wanted, but you had a huge outstanding debt load, and a high rate of borrowing. Here, the more you printed (and acquired through taxation), the increasingly more you have to pay others through higher expenses in Dr. Sumner dollars.

    With a high enough debt load, and ongoing debt dependency, your debt investors become pseudo de-facto owners of what you thought was your “Dr. Sumner dollar printing operation.” A country’s treasury that borrows too much is essentially selling control of its central bank to debt holders.

  4. Gravatar of Geoff Geoff
    3. February 2013 at 23:54

    What central bank will exercise its “I can print as many dollars as we want” at the cost of bankrupting the Treasury that finances the police force that protects the very monopoly privilege of the central bank?

    It would be like a slave owner believing that his power to kill all his slaves can actually be exercised while retaining his mastery over slaves.

    The power to print as many currency units as a central bank wants doesn’t mean it can actually print 10000000000000000000000000000000% exponent 100000000000000000000000 per second rate of inflation and survive.

    The central bank is not omnipotent, as much as you seem to want it to be.

  5. Gravatar of Benjamin Cole Benjamin Cole
    4. February 2013 at 02:19

    So you have John Taylor now bashing deflationary Japan for trying easy money (though he gushed about Japan’s QE in 2006) and Robert Hall saying Japan can do nothing once they get to ZLB.

    Maybe I am having problems understanding economics. The harder I try….

    Isn’t printing money supposed to be inflationary? And expansionary if an economy is well below full capacity?

    Of course, maybe top is bottom, and we are peering through Alice in Wonderland’s Looking Glass.

    Of the last eight monthly CPI reports six have been down. And the Fed is doing $85 bil a month in QE.

    Maybe I will go back to gardening for a living.

  6. Gravatar of Eisenhagen Eisenhagen
    4. February 2013 at 03:49

    Dear Mr Sumner,

    I apologize for mentioning something slightly offtopic, but I’m too excited to refrain from it.

    Gabe Newell of Valve Software speaks about setting up prediction markets and explicitly mentions NGDP level targeting as his personal favourite.

    http://youtu.be/t8QEOBgLBQU?t=49m8s

    I wonder where he encountered hat idea?

    http://www.themoneyillusion.com/?p=11159#comment-86874

    HT to Vaniver, who posted the link to the talk on Overcoming Bias:

    http://www.overcomingbias.com/2013/02/open-thread-62.html#comment-786246451

  7. Gravatar of Bill Woolsey Bill Woolsey
    4. February 2013 at 04:26

    Do new Keynesian models generally have exchange rates and trade?

    How can you depreciate the yen when there is no exchange rate in the model?

  8. Gravatar of anon anon
    4. February 2013 at 04:47

    Geoff, this is not correct. We’ve discussed this before. Japan can easily keep its debt stable in NGDP-relative terms. The “non-linearity” problem only arises when your goal is to keep the nominal amount of debt unchanged, or when increases in interest rates are not correlated to NGDP.

  9. Gravatar of ssumner ssumner
    4. February 2013 at 06:21

    Geoff, No, that’s not his claim.

    Bill, The model may not have exchange rates, but surely Hall knows that the real world does.

    Eisenhagen, Yes, I saw that too.

  10. Gravatar of marcus nunes marcus nunes
    4. February 2013 at 07:04

    Robert Samuelson ‘joins hands’ with Bob Hall:
    http://thefaintofheart.wordpress.com/2013/02/04/easy-pickings/

  11. Gravatar of Max Max
    4. February 2013 at 09:12

    “In this post I quote Hall discussing negative IOR and pointing out that there is no basis for the claim that the Fed is out of ammunition when rates fall to zero. He certainly didn’t buy all that “liquidity trap” defeatism that was circulating in 2009.”

    Yeah well, he was apparently confused since he proposed using reserve seignorage (IOR-FF) as a policy instrument. Setting a negative IOR doesn’t change the policy instrument – it remains the Fed Funds rate. For a negative IOR to be effective you have to remove the lower bound on Fed Funds.

  12. Gravatar of Doug M Doug M
    4. February 2013 at 09:53

    Your post raises a few different questions in my mind.

    “The persistent deflation in Japan since 1997 could have been avoided had the Bank of Japan followed different monetary policies.”

    Why did someone pick 1997 for this question? Japan’s bubble popped in 1990, and it was clear by 1992 or 1993 that the BoJ, MoF was lost.

    Why did Japan intervene in currency markets to keep the Yen strong through the ’90s / early ’00s?

  13. Gravatar of regular regular
    4. February 2013 at 11:54

    In this paper(”The Long Slump(pdf)” http://www.stanford.edu/~rehall/TheLongSlump.pdf), Hall says “Willem H. Buiter (2009) discusses ideas dating from the Great Depression that would depress the return on currency during periods of deflation and permit adequately negative real interest rates. He considers a number of alterations in currency policy that could have the same effect in a modern economy, such as the abolition of government-issued currency. None of these policies seems even remotely likely of adoption.”(pp.468)

    I guess Hall would think about negative IOR similarly.

    Instead, Hall supports tax policies that emulate the effect of low real rates.(pp.468)

  14. Gravatar of regular regular
    4. February 2013 at 12:10

    And Hall doubts feasibility of PLT(Price Level Target)when economy faces ZLB(He says “Adopting a price level target as a longer-term formulation of monetary policy has merit”, though).

    “Earlier commentary, starting with Krugman (1998), has suggested that central banks could overcome the problem of high real interest rates in slumps by raising expected inflation. One popular proposal is to make the goal of monetary policy one of keeping the price level on a growth path, rather than stabilizing inflation. Under this policy, the inflation rate would rise to correct a shortfall in the price level that developed during a slump. Then every episode of inadequate inflation would automatically generate expectations of corrective higher inflation and the problem of excess real interest rate from low inflation would be self-correcting. The Fed has declined to embrace this formulation of policy. Starting the policy in the conditions of the beginning of 2011 seems futile, given the lack of any policy tool that seems capable of changing the rate of inflation under these conditions. Adopting a price level target as a longer-term formulation of monetary policy has merit, however.”(pp.467-468)

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. February 2013 at 12:40

    Dr. Jekyl is back;

    http://johnbtaylorsblog.blogspot.com/2013/02/same-old-slow-recovery.html

    ‘The data released last week generated a lot of news stories, first bad ones about the GDP numbers and then good ones about the employment numbers. When you put the numbers in perspective, however, the economic story is little changed from what we have been experiencing for several years now: a continued weak economic recovery.

    ‘If you average out the -.1% and 3.1% growth in the third and fourth quarters, you get 1.5% growth for the second half of 2012 which is the about the same for the year as a whole, and down from 2% in 2011 and from 2.4% in 2010.’

    Lots of nice graphs too.

  16. Gravatar of ssumner ssumner
    4. February 2013 at 12:52

    regular, Actually, Hall spoke in support of negative IOR. But what puzzles me is why he changed his mind after 2009, when he did not believe monetary policy was ineffective at the zero bound. What new information caused him to change his mind?

  17. Gravatar of regular regular
    4. February 2013 at 13:29

    >Actually, Hall spoke in support of negative IOR

    Yes, I know it. So I am perplexed too. I guessed the reason why Hall changed his mind is that Hall thinks negative IOR is economically effective but politically infeasible, getting a hint from his comments about Buiter’s suggestion. But I’m not sure of this guess, and I also want to know what new information caused him to change his mind.

  18. Gravatar of Geoff Geoff
    4. February 2013 at 18:26

    anon:

    “Geoff, this is not correct. We’ve discussed this before.”

    Obviously if I am saying the same thing again, despite your protestations to the contrary, it’s because I think you’re wrong.

    I’ve already explained to you that Japan isn’t about to reduce the rate of its borrowing, considering how many special interest groups have become dependent on continued government borrowing.

    If Japan were to really do what you suggest, and simply print enough money to pay back existing debt, without incurring new debt, then all the obligations and expectations based on maintaining their current rate of borrowing, will be in for a rude awakening. Politically I don’t see that happening.

  19. Gravatar of Ben J Ben J
    5. February 2013 at 03:58

    “Of the last eight monthly CPI reports six have been down. And the Fed is doing $85 bil a month in QE.

    Maybe I will go back to gardening for a living.”

    Ben Cole, not sure exactly what you mean, because I have the last five CPI reports here:

    2012-12: 231.475 Index 1982-84=100
    2012-11: 231.254
    2012-10: 230.994
    2012-09: 230.580
    2012-08: 230.244
    Monthly, Seasonally Adjusted, Updated: 2013-01-16 10:27 AM CST

    That’s without food and energy. With those included;

    2012-12: 230.979 Index 1982-84=100 Hide Last 5 Observations
    2012-11: 231.025
    2012-10: 231.751
    2012-09: 231.414
    2012-08: 230.102
    Monthly, Seasonally Adjusted, Updated: 2013-01-16 10:08 AM CST

    I see the weakness you were talking about, but it’s basically all included in Food and Energy items. Core is consistently trending upwards, and current core inflation is a more effective predictor of future headline inflation than current headline inflation is.

  20. Gravatar of ssumner ssumner
    5. February 2013 at 07:31

    Ben J, Agreed, although even core inflation is below target.

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