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.