[Check out map of the battle at the bottom of post before reading]
Initially the people of the concrete steppes had the upper hand. Emboldened by the cry of “taper now!” they charged Woodford’s army and pushed them back. It looked like the battle was over, as the initial push in these economic battles usually determines the final outcome. Indeed this pattern is sometimes called “the efficient battle hypothesis.”
But Woodford’s army regrouped and charged to the call for Forward Guidance!! They pushed back and regained all of the lost ground, and then some. By 2:30 in the afternoon it was the people of the concrete steppes who were on the run. It looked like nothing could stop the NKs.
But wait, a third army suddenly swept onto the field! Sensing that Woodford’s army was weakened by the long battle, the market monetarists rallied to the cries of “income effect” and “Fisher effect.” Woodford’s early successes actually helped the market monetarists, by convincing everyone to be more bullish. That meant Woodford’s army was over extended, as it relied exclusively on the liquidity effect and was mired in bearish territory. His soldiers became confused by cause and effect. Which way do we go Mr. Woodford!?!?!?!
By late afternoon it began it look the like the Korean peninsula in 1953. The battle had raged back and forth, and the front lines ended up little changed from the beginning. One can only imagine the mood swings of the spectators. When stocks shot up Mr. Williamson had sudden visions of a Nobel Prize in economics. But those hopes were quickly dashed by the charge of Woodford’s army. He had forgotten about the forward guidance. Mr. Krugman was able to maintain an upbeat mood by continually revising his analysis, from “taper talk” to “promise to be irresponsible,” to “none of this really matters because we are at the zero bound stupid.” He was much more clever than the other spectators, and was prepared for any outcome. He was determined to be proved right, whatever happened.