On Monday I made this observation:
Lars Svensson is one of the few policymakers who will come out of this debacle with his reputation intact. I’m surprised Krugman hasn’t mentioned him in his blog posts. (They are colleagues at Princeton.)
Yesterday Paul Krugman made this observation.
In Sweden, my former colleague Lars Svensson, now at the Riksbank, is concerned about the desire of his colleagues to raise interest rates in the face of inflation far below target and an economy that is a long way from having fully recovered. But what does he know? He’s just one of the world’s leading monetary economists, having spent a great deal of time studying problems of monetary policy at the zero lower bound.
But that’s not the reason for this post. This is:
Snark aside, the rise of the pain caucus is truly amazing – I’m a hardened cynic, yet even I didn’t see that one coming. As Posen points out, mainstream macroeconomics – which suggests that we need a lot more stimulus, monetary and fiscal – has actually held up very well in this crisis; it has, above all, made the right predictions about inflation and interest rates, while the doctrines underlying the pain caucus have gotten it all wrong. Yet “serious” policy makers are rejecting the theory that works in favor of theories that don’t.
Exactly. And the same thing occurred in the Great Depression. The most respected monetary theories going into the Great Depression were the more progressive price level/NGDP targeting views of people like Fisher, Keynes, Hawtrey, Cassel, Pigou, Hayek, etc. And their predictions of the catastrophic implications of a big drop on the price level and/or NGDP were borne out. And policymakers completely ignored their advice and went with their gut instincts.
Even though I spent much more time studying the Great Depression than Krugman, I was even more wrong about the response of monetary policymakers than he was. (I.e., I was more optimistic.) A triumph of hope over experience on my part.