Mark Carney on the (zero?) fiscal multiplier
Daniel sent me to this interesting FT article:
Questioned whether his call for true fiscal adjustment put him out of line with the fund’s call for the UK authorities to consider easing up the pace of deficit reduction while demand remained weak, Mr Carney made it clear that he did not see the level of fiscal austerity as a major constraint on the BoE’s ability to stabilise the economy.
“Central banks take fiscal policy as given and treasuries take monetary policy as given – that’s the separation,” Mr Carney said. “I’m not going to wade in [on fiscal policy] positively or negatively”‰.”‰.”‰.”‰except in the most extreme circumstances when growth threatens financial stability”.
That’s not quite a zero multiplier (because of the term ‘major’), but it’s pretty close.
And then there’s this:
One likely change of policy is that the BoE will start to steer individuals and markets towards an understanding that interest rates will probably stay exceptionally low until a threshold on unemployment or growth has been achieved. This guidance would aim to encourage spending.
Mr Carney is an advocate of such tools and dismissed fears that guidance might be counter-productive if the central bank subsequently found that the underlying health of the economy was worse and had to raise interest rates before the threshold had been reached. The incoming governor said it would be clear to individuals that inflation “is an element of the reaction function” and so such fears would not arise.
Sir Mervyn King, the departing BoE governor, expressed just such concerns this week. He told an IMF conference: “In a model it’s very simple to give guidance. But what happens if the structural interpretation of given level of unemployment changes? Then you have to backtrack and you don’t want to backtrack on conditional guidance.”
Of course there’s some truth to King’s criticism. But on balance I support Carney’s proposal to adopt a sort of “Evan’s Rule.” It’s not NGDPLT, but it’s a small step in that direction, and hence is better than current policy. Of course he still has to get the BoE to go along:
Playing down expectations stoked up by Mr Osborne that his arrival would see the pace of economic growth move up a gear, Mr Carney pointed out that the governor’s power “can be overplayed” and policy could not change without the support of others in the central bank.
“I am a member of the [Monetary Policy] Committee, so any decision is not mine – but a decision of the MPC as a collective,” he said.
Still very busy today–will get to comments tomorrow. Strong 3.2% consumption boost in Q1–that payroll tax increase sure hammered consumption!
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26. April 2013 at 06:17
Should we call it the Carney Critique?
Just my opinion, but I think it is fractionally more likely that the BOE will adopt forward guidance around NGDP than something like Bernanke-Evans, because King’s hatred of targeting anything “real” will be widely shared on the MPC.
I can’t see Carney getting consensus on that, but I can see him getting consensus on NGDP guidance; the BoE already “guide up” NGDP when they do QE, so it would be an evolutionary change.
26. April 2013 at 07:04
I think there is an important lesson from control theory here though. The response (QE) would converge more rapidly if the rule for monthly purchases integrated the gap over time so that persistent gaps were backed by increasingly aggressive stimulus. Further if we incorporate the rate of convergence we can 1) react strongly to an increasing gap, and. 2) moderate the integratal if the gap is closing at a prescribed rate.
Pledging a fixed purchase until the threshold is reached is not as convincing a policy.
26. April 2013 at 07:54
Umm, he just said he isn’t commenting on fiscal policy, not “close” to saying the multiplier is zero.
What he DID say is this:
“”The fundamental question is can central banks, in and of themselves, deliver sustainable growth? The answer is ‘no’.”
There you have it. CB cannot deliver sustainable growth.
26. April 2013 at 08:16
“Still very busy today-will get to comments tomorrow. Strong 3.2% consumption boost in Q1-that payroll tax increase sure hammered consumption!”
+1
26. April 2013 at 08:59
I’m not sure I understand the consumption comment — isn’t it somewhat surprising that consumption has performed as well as it has in the face of the tax hikes?
26. April 2013 at 09:09
OhMy -quite right – CBs cannot deliver sustainable growth. They can “enable” or “disable” it. Say by having 15 years of loose credit that made working a mug’s game compared to property speculation.
As a layperson the thing I find so frustrating about economics is the lack of realpolitik. I live in the UK and I can tell you for a fact it’s going to get a lot worse. Demographics, low education standards and an economy built on house price inflation / banking are a recipe for disaster.
People who have a more holistic view, outside of the abstract thinking of economics, know the UK is in a real mess. Why else would they kick off sub-prime II with “help to buy”. It’s desperate times down here. Yet any “success” on making the cost of living more via housing will simple be read on here as “GDP went up 0.1%” with no idea whether true wealth was created or more credit was extended on an asset that used to cost less.
26. April 2013 at 09:46
Scott, surely you don’t think increasing the payroll tax is a good idea?
26. April 2013 at 10:58
@Jon Rodney: “Sumner Critique”. Monetary policy dominates NGDP. Fiscal policy “doesn’t matter”. Those who are surprised that consumption goes up when taxes go up, implicitly have a theory that fiscal policy matters for aggregate demand.
It matters, but only as much as the direction of wind matters for a boat to reach port. It’s a minor push, but the captain with the boat’s controls can trivially compensate for any likely wind in any direction. So the particulars of the wind aren’t an important factor when thinking about whether the boat makes it to port.
26. April 2013 at 11:11
“If we just tweak fiscal and monetary policy, these old people buried to their eyeballs in personal debt will suddenly be very productive and the economy will grow!!!”
–Retard Central Bankers
http://www.gfmag.com/tools/global-database/economic-data/11855-total-debt-to-gdp.html#axzz2Rb9Oxn3A
26. April 2013 at 11:29
@Don: I understand you (I think), but given a fairly static monetary policy, we would still expect fiscal policy to make a difference. And I can’t think of any significant change in the stance of US monetary policy since the Fed announced open-ended QE last fall. Under those circumstances, why wouldn’t we expect a tax hike to impact both real and nominal growth?
26. April 2013 at 12:02
@OhMy: “he just said he isn’t commenting on fiscal policy.”
No, he also said that he: “did not see the level of fiscal austerity as a major constraint on the BoE’s ability to stabilise the economy.”
In other words, the fiscal government can do whatever they want, and it won’t stop the central bank from achieving whatever target it wants. AKA, the multiplier is essentially zero.
“CB cannot deliver sustainable growth.”
You left off the critical “in and of themselves.” Everyone knows there is more to macro than just monetary policy. Central banks have no control over what fraction of NGDP growth goes to inflation, vs. RGDP. They have no control over the natural rate of unemployment. Etc. The only thing they can really do, is avoid recessions due to inadequate demand. (And, perhaps, prevent excess inflation.)
However, since this happens to be the primary problem holding down growth in the world economy today, there happens to be a lot they could do about real growth in the current special circumstances.
26. April 2013 at 12:57
Don Geddis
“No, he also said that he: “did not see the level of fiscal austerity as a major constraint on the BoE’s ability to stabilise the economy.””
Apparently he was thinking about inflation but not about unemployment which went markedly up since the onset of austerity. But hey, inflation is stable, no worries.
26. April 2013 at 12:59
Don Geddis,
“Etc. The only thing they (CBs) can really do, is avoid recessions due to inadequate demand.”
Really? How can they avoid a recession in a hypothetical case when a massive bubble pops and most of the private sector is bankrupt, like underwater on their mortgages?
26. April 2013 at 13:05
@OhMy: “How can [central banks] avoid a recession in a hypothetical case when a massive bubble pops and most of the private sector is bankrupt, like underwater on their mortgages?”
Being “bankrupt” is a nominal problem, not a real problem. Being “underwater” on mortgages is a nominal problem, not a real problem.
The problem is that these individuals had fixed nominal debts, but highly variable nominal income.
Central banks have absolute control over nominal variables. If only they had stabilized nominal income (well within their abilities), then the private sector would not be bankrupt, nor would it have excessive underwater mortgages.
26. April 2013 at 15:54
The great thing about the GDP report is that everybody can claim that it supports their view.
1) Of course the tax increase didn’t impact GDP, everybody knows tax cuts in a recession just go to savings, that’s why you need the government to spend money, as you can see, a 3.2% increase in consumer spending was offset by even slight government cuts.
2) Of course the tax increase didn’t impact GDP, the central bank offset the impact through QE.
3) Of course the tax increase didn’t impact GDP, everybody knew the tax holiday was temporary, so they just saved the money and didn’t change their spending habits at all. Everybody knows that the only way tax cuts have any impact is if they are permanent cuts to tax rates, like the permanent Reagan and W. Bush tax cuts.
26. April 2013 at 16:34
Don Geddis,
“Being “bankrupt” is a nominal problem, not a real problem. Being “underwater” on mortgages is a nominal problem, not a real problem.”
I know all that.
“Central banks have absolute control over nominal variables.”
Incorrect.
Central banks do asset swaps, and cannot change the net worth of the private sector (so cannot replace lost equity). They can push the private sector to *expand* its balance sheet by taking on more debt and create more deposits, unfeasible if the private sector is underwater – banks won’t lend, it won’t borrow.
“If only they had stabilized nominal income (well within their abilities)”
How is this within their capabilities? CBs cannot do fiscal policy which is an income stream. You are mixing up fiscal and monetary policy. Fiscal policy is asset injections (spending) and withdrawals (taxing) so it changes balance sheets, monetary policy is asset swaps, so liquidity management and setting interest rates.
26. April 2013 at 17:07
Scott,
“Mr Carney made it clear that he did not see the level of fiscal austerity as a major constraint on the BoE’s ability to stabilise the economy.”
I don’t read this, in combination with Mr. Carney’s other remarks, as saying that the fiscal multiplier is zero, but rather that, whatever the fiscal multiplier is (within reason), monetary policy can “stabilise the economy.” Isn’t this more or less consistent with your view?
26. April 2013 at 17:28
Greg Hill,
The fiscal multiplier cannot be computed without considering monetary offset. If, after the central bank has acted, the fiscal change had no effect, then the fiscal multiplier is zero. If fiscal policy can be whatever and Carney can still choose whatever inflation rate he wants, then the fiscal multiplier is zero.
26. April 2013 at 19:30
ssumner, methinks it is unwise to repeatedly state the fiscal mulitplier as/is zero… during this time period… even in the US.
At the moment, I sigh when I think of the many sides of monetary policy.
I sigh against both your position and the nearly 180 deg opposite (for example, Robert Pringle who, unlike you, is full of wisdom, yet IMHO his ideas are far off, too radical, too futuristic).
Yet, at the moment, I would prefer Mr. Pringle’s prescriptions to Mr. Sumner’s.
26. April 2013 at 20:13
@OhMy: You’re right about the difference between what fiscal vs. monetary policy is. But you’re wrong about the effects of monetary policy. Your model contains only the least important mechanism. The most important mechanism is the “hot potato” effect, in which monetary policy changes the currency base, and then velocity changes, and then NGDP changes. Via a mechanism which has nothing to do with interest rates or credit expansion.
26. April 2013 at 20:39
I’m attempting to reconcile the sectoral (and international) balances approach vs. the market-monetarists view
Currently, I’m persuaded by the sectoral balances view.
In that, I can buy into the “hot potato” effect of QE(etc).
BUT only, mostly affecting pricing in asset markets AND NOT, filtering into the “real” (aka AS aggregate-supply) side of the economy (eg asset inflation not CPI)
What are the most persuasive arguments against that ?
26. April 2013 at 21:28
As always, excellent blogging.
One worry: Recently I have interviewed many institutional investors in real estate, guys who run funds eith hundreds of millions and cumulatively billions in equity.
To a man (they are all men in that industry) they say they do not invest with an eye on the Fed or central banks. They invest based on current interest rates and economic trends in whatever part of the globe under consideration, and if the investment “pencils out” or returns more than 5 percent annually.
Many said central bank policy is unpredictable, and could change at any time.
In short, the globe’s central banks do not have any credibility, and investor understanding of central bank policy is limited.
This suggests to me that central banks need to speak much more clearly and with more resolve and in only one voice. Having a contrary FOMC is a terrible idea. One central bank, one chairman who is czar, and that’s it.
Secondly, central banks have to really pour it on into QE, so much so that money is spilling over into the real economy, and not just into swelling bank reserves.
This is not a time for central banks to mumble, act coy, play sophisticate about inflation. It is a time to print money to the moon. Time to force feed cash into the system, with firehouses is necessary.
The biggest risk to prosperity today is Fed feebleness and dithering. See Japan from 1992 for clues how a vacillating central bank, with unmanly fears of inflation, plays out.
27. April 2013 at 00:41
Larry Ball wants to raise the inflation target: http://www.econ2.jhu.edu/courses/302/Econ302_Spring2013_Prof%20Ball's%20paper%20on%20a%204%20percent%20inflation%20target.pdf
27. April 2013 at 02:16
BoJ is Targeting the Forecast: http://uneconomical.wordpress.com/2013/04/26/boj-in-targeting-the-forecast-shock/
27. April 2013 at 04:59
Britmouse, I agree.
Jon, I’ve made that argument too.
OhMy, Read it again.
Jon Rodney, I was being sarcastic.
Edward, I do, but it should have been accompanied by an equal cut in the employer-side payroll tax.
Greg Hill, Yes, it’s consistent with my view. See J’s comment.
Ricardo, If real asset prices rise, it must reflect expected changes in the real economy.
Saturo, Thanks, I’ll take a look.
27. April 2013 at 05:04
Saturos, Do the markets also expect a 1.9% inflation rate, ex-VAT?
Regarding 4% inflation, I’d much prefer 4.5% NGDPLT.
27. April 2013 at 05:22
Maybe consumption was up in the last quarters but all the numbers weren’t so rosy. Business investment was down and GDP was beneath expectations. Then there were last month’s poor BLS job numbers.
You said that we should hold you to 4% NGDP and 2% RGDP.
In early April Sumner said that while it often seems that he makes unfalsifiable predictions, we can absolutely hold him to one prediction: if NGDP is below 4% for the year or RGDP is below 2% then the Fed didn’t wholly offset the fiscal austerity of the sequester, etc. as the Sumner Critique predicts.
“Just so that you don’t think I always cop out on past predictions, post this one on your wall:
“If NGDP growth during 2013 is less than 4%, or if RGDP growth is less than 2%, then I believe fiscal austerity will have reduced growth somewhat. In other words, I believe the Fed will have failed to offset the expected fiscal austerity with its QE3 policy of late 2013.”
“Hold me to it.”
http://diaryofarepublicanhater.blogspot.com/2013/04/good-news-and-bad-news-in-todays-25-gdp.html
Obviously yesterday’s number was above the threshold but still we’re behind schedule based on expectations. The first quarter was expected to be a little faster. Forecasters have it slowing down in the next few quarters.
It’s early but I’m just saying yesterday’s numbers weren’t all peaches and cream.
Many saw last month’s alarmingly weak job numbers from BLS as being at least partly driven by the payroll tax hike.
27. April 2013 at 05:31
Totally off subject, I’ve started reading Laurence Seidman’s book about the progressive consumption tax-it was specifically about the proposed “USA Tax” by Pete Domenci (R-New Mexico) and Sam Nunn (D-Georgia) a few years ago.
http://www.amazon.com/USA-Tax-Progressive-Consumption/dp/0262514532/ref=sr_1_1?s=books&ie=UTF8&qid=1367069305&sr=1-1&keywords=laurence+seidman+usa+tax
I still find the idea of a progressive consumption tax just totally counterintutiive but am trying to keep an open mind.
I am impressed by who has supported it at least. According the Seidman the idea of a progressive consumption tax is only about 50 years old-now 57 years. Believe it or not the first modern proponent according to him was Nicholas Kaldor and even Keynes had said it was “perhaps theoretically sound but practically impossible.”
27. April 2013 at 05:38
One thing I really liked about the USA Tax was the proposal for a payroll tax credit. SS would apparently not be impacted.
27. April 2013 at 08:18
Mike, You said;
“Maybe consumption was up in the last quarters but all the numbers weren’t so rosy. Business investment was down and GDP was beneath expectations.”
Since when does the Keynesian model predict a payroll tax cut will raise C and reduce I?
You said;
“In early April Sumner said that while it often seems that he makes unfalsifiable predictions, we can absolutely hold him to one prediction: if NGDP is below 4% for the year or RGDP is below 2% then the Fed didn’t wholly offset the fiscal austerity of the sequester, etc. as the Sumner Critique predicts.”
That’s right, and I wouldn’t be at all surprised if the so-called “Sumner critique” was off in its prediction, as most central banks are at least slightly incompetent, and hence are unlikely to precisely offset fiscal austerity. I think the multiplier is zero on average, but not in every single case. Let’s see how this one turns out. It might be positive or negative.
But the way, if people think I’m making unfalsifiable predictions, they aren’t paying attentions. I’ve been claiming the conservative fear of higher inflation was unjustified since day one, and have been correct. I’ve been claiming that central banks can depreciate their currencies, even at the zero bound, and have been proved right.
27. April 2013 at 08:27
Scott, I wasn’ accusing you of making unfalsifiable predicionts. I was quoting you saying that a number of people think you do-rightly or wrongly. Sometimes I’ve thought you were and then later realized there was a “method in your madness:
Look, I’m not trying to take a shot. As you can see by my looking into the consumption tax and “public fiannace”-Seidman is certainly someone to go for that right? I keep an open mind
27. April 2013 at 08:30
Scott when you ask this:
“Since when does the Keynesian model predict a payroll tax cut will raise C and reduce I?”
We just had a payroll tax hike. I think it depends on which Keynesian model you have in mind in any case. Certainly I found Lucas interesting-J.W. Mason backed it up-that the NK model is quite different than “Old Keynesianism” in that NK sees stimulus as being about nothing but rising inflation.
27. April 2013 at 08:54
Scott, I caught the sarcasm — I just don’t understand its source. If the Fed were loosening policy to offset the tax increases, then I could see why sarcasm at the thought of falling consumption would be warranted. But there doesn’t seem to have been any significant change in the stance of Fed policy this year, so why is your expectation that a tax increase would not affect nominal (and real) growth?
27. April 2013 at 10:17
There are basically two ways of looking at this:
1. The Fed is a thermostat.
2. The Fed is just a third chamber of the legislature. (Or a fourth branch of government if you prefer.)
I’ll call #1 the Monetarist view, and #2 the Keynesian view for simplicity. (Call it the Sumner vs. Krugman view if you prefer.)
If the Fed just measures economic conditions, and reacts accordingly, not caring if spending is on a Federal Cowboy Poetry Festival or a Microsoft Software Conference, then Sumner is right.
If the Fed Chairman wrangles for votes, gets enough for $85 Billion a month in bond purchases, and can’t get any more regardless of economic conditions, then perhaps Krugman is right that Congress has to borrow for Cowboy Poetry Festivals to increase velocity.
Obviously, I think Sumner should be right, and if he’s not, we need to change the Fed’s mandate to make him right. (Not because it matters whether he’s right, but because it’s better for the country.)
27. April 2013 at 12:28
Mike, That was a typo on my part, I meant a tax increase.
Jon, The Fed moved late last year to try to offset the expected effects of the payroll tax increase.
Negation, You said;
“Obviously, I think Sumner should be right, and if he’s not, we need to change the Fed’s mandate to make him right. (Not because it matters whether he’s right, but because it’s better for the country.)”
Exactly, and that’s what 99.9% of the debaters on both the left and the right don’t see. The entire austerity debate is moronic. The debate should be over monetary policy.