Here’s Paul Krugman’s latest:
David Beckworth has a good post pointing out that the Fed has been signaling all along that the big expansion in the monetary base is a temporary measure, to be withdrawn when the economy improves. And he argues that this vitiates the effectiveness of quantitative easing, citing many others with the same view. My only small peeve is that you might not realize from his list that I made this point sixteen years ago, which I think lets me claim dibs. Yes, I’m turning into one of those crotchety old economists who says in response to anything, “It’s trivial, it’s wrong, and I said it decades ago.”
Krugman may be 2 years older than me, but I’m more grouchy and reactionary. And thus I can’t help pointing to an article I did 21 years ago (5 years before Krugman’s admittedly far superior paper.)
[Note (1=r)n and (1+r)x are meant to be (1+r) raised to the power of n or x. I don’t know how to do superscripts.]
For example, suppose that at time=zero there is a nonpermanent currency injection that is expected to be retired at time=x. Then, if the real return from holding currency has an upper bound of r, the ratio of the current to the end-period price level (Px-n/Px) cannot exceed (1 + r)n. Furthermore, if real output is stable, it would not be expected that Px would be any different from Po. Both price levels would be determined by the supply and demand for money, as in the quantity theory. The existence of a maximum anticipated rate of deflation (r) has the effect of placing a limit on the size of the initial increase in the price level. No matter how large the original currency injection, the price level at the time of the currency injection cannot increase by more than a factor of (1+r)x. Furthermore, these restrictions on the time path of prices can be established solely on the basis of the future time path of the quantity of money, without any reference to fiscal policy. It is this quantity-theory model that is applicable to the colonial episodes of massive and nonpermanent currency injections. . . .The impact of U.S. monetary policy during the period from 1938 to 1945 provides a good illustration of the preceding hypothesis. Between 1938 and 1945 the currency stock increased by 368 percent while prices (the GNP deflator) increased by only 37 percent. There was no depreciation in the dollar (in terms of gold.) Although real output grew substantially, the ratio of currency to nominal GNP increased from .062 to .132. Why was the public willing to hold such large real balances?
Although the U.S. did not experience deflation following World War II (as it had following previous wars), surveys indicate that deflation was anticipated. During the entire period from 1938 to 1946, the three-month Treasury Bill yield never rose above 1/2 percent. The fact that massive currency injections (associated with expectations of future deflation) were able to drive the nominal interest rate down close to zero, is at least consistent with the modern quantity-theory model I have described.
And stay off of my lawn!
Update: David Glasner found an even older example. (I’m sure there are dozens out there.) But I’d quibble slightly with this:
For one thing, reasoning in terms of price levels immediately puts you in the framework of the Fisher equation, while thinking in terms of current and future money supplies puts you in the framework of the quantity theory, which I always prefer to avoid.
I can’t help pointing out that the Quantity Theory, the Fisher effect, and PPP are three very similar theories, which share almost exactly the same strengths and weaknesses. And let me add that all three have enormous strengths and massive weaknesses. (Yes, the Fisher effect isn’t actually a theory, but you can imagine an associated theory that says nominal interest rates change one for one with inflation. Or if you prefer you can compare the Fisher equation with the very similar MV=PY equation.)
These three theories say the real interest rate, the real demand for money, and the real exchange rate are stable. All three theories are far more useful at double-digit inflation rates than single-digit inflation rates.