. . . or give you applause.

I recently argued that pragmatic libertarians (like me) can talk to hardcore libertarians, and to progressives, but just not at the same time.  Most of my non-monetary posts upset one side or the other.  But what happens when you do a post and it’s not clear who’s ox is being gored?  To see the consternation, read the comment section from this Will Wilkinson post.

It’s almost like some people can’t make up their mind whether Will said something brilliant and incisive, or insensitive and insulting, until Will tells them whether his cryptic message was buttressing their preconceived opinions, or ridiculing them.

He said what he said, it’s up to us to figure out what it means for our cherished beliefs.

PS.  No offense to his commenters, they are some of the best.

. . . the new Keynesians believed that Congress should focus of long run fiscal balance, and central bankers should target inflation (and by implication, aggregate demand?)  It seems a long time ago.  Here’s Ben Bernanke testifying to Congress in 2006:

Well, in our short-term monetary policymaking, we are able to adjust for the conditions of fiscal policy, however they may be. I think fiscal issues are more important in the long-term sense because of the long-term obligations we have, for example, for entitlements. We have not found the fiscal situation to be a major impediment to our short-term management of monetary policy.  (emphasis added.)

New Keynesianism reigned supreme in 2006.

In the UK the Labour government dramatically increased the budget deficit over the past decade, partly for anti-recession reasons, partly out of desire to increase the share of GDP going to the government (without raising taxes.)  The new coalition government that took office in May was faced with an appalling fiscal mess, in some ways even worse than the US.  They adopted a very responsible policy of gradually cutting the budget deficit, by half over 4 years (to a level that would still be unacceptably high) and simultaneously encouraging the Bank of England to maintain adequate growth in nominal spending.  It’s hard to think of a more mainstream new Keynesian policy.  New Keynesianism seems alive in the UK.

[Update:  A commenter pointed out I was in error in my description of deficit reduction, they plan to eliminate the deficit by 2015.  That’s certainly good to hear. (This always happens when I rely on memory.)  Update#2, not quite eliminate it, Left Outside sent me the data]

And yet back in August 2010, when Paul Krugman had to find a name to identify with mainstream new Keynesianism, here’s the only economist that came to mind:

And I don’t understand at all [Koo’s] argument that monetary expansion is positively harmful. He seems to be making up arguments on the fly here; he’s so determined to defend the primacy of fiscal policy that he has to insist that anything else is a very bad thing. (In that sense, I guess, he’s the anti-Scott Sumner).

That’s right, the “primacy of monetary policy,” once a central tenet of New Keynesianism, is now reduced to a stump group headed by yours truly.  When I ask other economists what happened to mainstream new Keynesianism, the only answer I get is that we are in a new world because interest rates are zero, and monetary policy is out of ammunition.  But does situation in the UK look like a liquidity trap?  Like a central banks that is trying to inflate, but is out of ammunition?

Consumer price inflation surged to a two-year high of 4.0 percent from 3.7 percent in December, providing an awkward backdrop for the central bank’s updated quarterly growth and inflation forecasts on Wednesday.

Sterling hit a four-week high against the euro after the data and interest rate futures fell as investors bet on a series of rate rises over the coming year, starting in May.

In an obligatory letter to the government to explain why inflation remained so high, Bank Governor King highlighted differences of views on the monetary policy committee, raising speculation the hawkish minority was gaining ground.

“While Mervyn King would undoubtedly prefer to avoid increasing rates for now, he conveyed the impression that he has moved onto the back foot,” said Philip Shaw, an economist at Investec.

Rather than stress the one-off and temporary nature of upward price pressures, King admitted inflation was as likely to be above target as below it in two to three years’ time assuming interest rates rose as markets expected.

Analysts interpreted these comments as effectively endorsing market expectations of a May rate rise. Most economists until now have stuck with forecasts that rates would not rise until later in the year.

“We now expect the next move from the Bank of England to be a 25 basis point rate hike in May,” said Nomura economist Philip Rush who had previously expected an August move.

I feel like I am in some sort of Alice in Wonderland reality, where all the laws of economics are turned upside down.  Paul Krugman seems to like Ed Balls views on stimulus (he’s a prominent Labour Party critic of austerity), but I doubt he would buy into his views on inflation:

Shadow Chancellor Ed Balls noted the government was not only suffering higher inflation than its main trading partners but also slower growth, and blamed the government’s austerity drive for putting the Bank in such a dilemma.

“It’s the worst of all worlds and I think the Bank is in a very difficult position,” Balls said. “The government is not supporting growth in the economy and at the same time they are pushing inflation up.”

Um, I thought “pushing inflation up” was precisely how governments were supposed to “support growth.”  Wasn’t that new Keynesian orthodoxy?  I am seeing more and more commenters arguing that fiscal policy raises RGDP and monetary policy raises inflation, even though the standard Keynesian model says they both raise RGDP when output is low, and they both raises prices when output is high.  I don’t even know the name of this new model.  Over the next few months it will be interesting to watch Paul Krugman’s reaction to this development on the left.  Will he try to maintain his distinguished new Keynesian credentials, or wander off with the Ed Balls of the world into Wonderland?

I hope we all can agree that a BOE that is getting ready to raise rates in May is not stuck in some sort of “liquidity trap.”  But then what is the rationale for the bizarre policy debate in the UK?  And why has new Keynesianism circa 2006 also disappeared in the US?  Don’t believe it has?  Arnold Kling has noticed the same phenomenon:

I  am prepared to offer pushback against the Sumner-Hetzel viewpoint [that excessively tight money explains the severe recession.]  However, it really deserves the status of the “null hypothesis.” In a more reasonable world, everyone would be starting from the presumption that Sumner and Hetzel are correct. Those of us arguing folk-Minskyism and telling the Recalculation Story should be the ones fighting an uphill battle to bring our ideas into the policy debates. That this is not the case, and that SC [the scholarly consensus] is now on the fringe, is one of the most remarkable stories of this whole macroeconomic episode.

Even more remarkable, very few new Keynesians even seem aware of the fact that their model is gone, it’s disappeared.  Curiouser and curiouser . . .  

PS.   Help me name this new bastard Keynesianism.  The view that only fiscal stimulus raises RGDP.  It’s not Post Keynesianism, as they don’t even think the central bank can cause inflation.  Paul Krugman mentions Koo as a leader.  No, I won’t go there . . .

PPS.  I actually read the entire Bernanke testimony from 2006.  All I remember is a bunch of Dems demanding more housing loans on ever easier terms, and several Republicans warning about Fannie and Freddie getting overextended.  It made me revise my views on the housing crisis. I used to think both parties were equally to blame, now I think the Dems were slightly worse.  Oh, and there’s also Barney Frank not understanding the distinction between real and nominal wages.

HT:  Thanks to W. Peden for the tip about Ed Balls, and Daniel Carpenter for the Bernanke testimony quote.

The recent debate over stimulus in the UK has to count as one of the most bizarre spectacles of modern macroeconomics.  Here’s a recent comment by Matt Yglesias:

Bad central banking puts political authorities in a very tough place. There’s an interplay between fiscal and monetary issues. The goal of stabilization policy is to stabilize the path of overall nominal spending in the economy. Fiscal policymakers can’t really push nominal spending above the path that the central bank wants it to be on. So if King says “looser fiscal policy will force me to tighten monetary policy” then you’re in a tough pickle. Some folks, à la Scott Sumner, believe that the inverse of this is also true, that monetary targets are not only necessary but sufficient. It seems to me that King, Clegg, and Cameron were all counting on this being true. Most conventional New Keynesians””including Shadow Chancellor Ed Balls, Ben Bernanke, Paul Krugman, etc.””have had their doubts about this theory and actual events in the UK seem to be reenforcing this conventional wisdom. When the goal is to increase the volume of nominal spending in the economy you don’t want the largest spender (to wit, the government) reducing spending and raising taxes.

Usually Matt is the voice of reason, but not this time.  The claim here is that a more robust fiscal stimulus would result in higher nominal spending, and ipso facto, higher inflation.  This is the “conventional wisdom” that Yglesias contrasts with my unconventional take.  If Matt is right, you’d expect outrage in the UK regarding the policy of the Bank of England, more specifically, widespread criticism of its failure to push inflation up to its inflation targets (they are formally required to target inflation.)  OK, that’s the conventional wisdom; now let’s see what is going on in the real world.  Here’s the real voice of reason, Simon Nixon:

There was something surreal about today’s Bank of England press conference to discuss its latest Inflation Report. The BOE says quite clearly in its executive summary – and Governor Mervyn King repeated it continually – that “the chances of inflation being above or below the 2% inflation target in the medium term are broadly equal”. But there was nothing broadly equal about the line of questioning from the assembled journalists: unless I blinked at the wrong moment, I don’t remember a single question about the risks to the downside. Instead, the Governor was subjected to a sustained and faintly hysterical assault, with almost all the questions a variant on the accusation that the BOE had either deliberately or incompetently lost control of inflation. Under the circumstances, I thought Mr. King handled it rather well.

As Mr. King repeatedly said, the arguments over the medium-term implications of today’s high inflation numbers are evenly balanced and something on which it is possible for reasonable people to disagree. Unless one really believes that a committee of nine independent-minded economists have collectively agreed for reasons known only to themselves to ignore the mandate given them by a democratically elected government and concoct bogus arguments to cover up their mendacity, then it seems only fair to consider the BOE’s dilemma from both sides. As I see it, the risk of a tough year for the U.K. economy, with all that implies for inflation, is every bit as worthy of attention as the risk that everything goes swimmingly. Indeed, many of those attacking the BOE today for not doing more to cool the economy are those who normally fill their days attacking the government for leading the country to almost certain ruin. Odd.

Yes, very odd, and it’s nice to finally have someone in the press notice what is going on.  Unless every single reporter in the UK works for Fox News, I think it’s fair to say that the general perception is that inflation is too high, not too low, as the Krugman/Yglesias view would suggest.  That doesn’t sound like a failure of demand stimulus, it sounds like the UK has a pretty big supply-side problem.

Now in their defense, the Keynesians do have a good counterargument.  Maybe the 4% inflation figure is a fluke, there’s VAT and import prices mixed in.  Maybe the UK does need more demand stimulus.  I’m sympathetic, but it greatly undercuts their critique of King, for two reasons:

1. It that case isn’t it equally likely that the minus 0.5% Q4 RGDP number was also a fluke?  (I believe Japan and the Eurozone had similar numbers.)  If I’m not mistaken, that’s the number the Keynesians are using to pronounce Cameronomics a failure.  And unless I am mistaken hardly any of the Cameron budget cuts had taken effect by Q4.  And unless I’m mistaken the Cameron government was elected in May, and Q4 starts in October.  And unless I’m mistaken the prominent Keynesian Mark Thoma recent scolded me for making the preposterous argument that QE rumors in September might have affected the US economy in January—lags are much longer than that.  So are long monetary lags the official Keynesian view, or not?  If so, King’s “offset” policy hasn’t yet had time to work.

2.  I actually agree with Krugman and Yglesias that the UK could use a bit more stimulus.  I don’t buy the recent inflation number.  But my views aren’t what matters.  All the articles that I have read suggest that King is trying as hard as he can to maintain monetary stimulus, despite the unpopularity of 4% inflation.  Suppose the Keynesian fiscalists had they way, and Cameron did a lot more fiscal stimulus.  And rising NGDP started pushing inflation above 4%, maybe toward 5%.  Does anyone believe King could allow that to happen?

I think Yglesias is making the following error:

1.  King is trying hard to implement Sumnernomics in the UK.

2.  The UK economy sure looks messed up.

3.  Ergo Sumnernomics has failed.

BTW, I suppose the term ‘Sumnernomics’ sounds egotistical, but Yglesias did mention my name.

Now can we please talk about how negative IOR is doing in Sweden, by far the fastest recovering Western European country?

🙂

Britmouse sent me two great articles from the WSJ, the one cited above, and this one on the BOE’s real target:

These unemployment levels would have been unacceptable and therefore the bank was right to pursue the policy it did, runs King’s argument.

This seems to offer an insight into what may effectively be the new target the bank, unofficially, tracks: nominal GDP. That’s to say, GDP with inflation factored back in.

King explicitly denies that the monetary policy committee is tracking nominal GDP. But he can’t do otherwise. The MPC has an explicit and quite clearly stated central target of 2% consumer price inflation, plus or minus one percentage point.

A look at the bank’s latest median projections for U.K. CPI and real GDP, on which it bases its policy-making decisions, shows that bulges in inflation projections over a period of a year have tended to accompany declines in real GDP growth, and vice-versa, hinting at a nominal GDP target of around 5% or slightly higher.

Some academic economists are strongly supportive of nominal GDP targeting “” allowing inflation to run too hot at a time when real GDP is growing too slowly and then tightening after the rate of nominal growth exceeds a certain level, once previous shortfalls in nominal growth have been made up.

For now, the market seems content to ignore the BOE’s consistent and one-sided mistakes.

Or maybe they aren’t mistakes; maybe the markets understand Sumnernomics better than the media.

PS.  I hope Britmouse won’t mind me quoting from the email he sent me:

Merv King was forced to deny he targets NGDP in the Bank’s inflation conference today, then spent the rest of the time arguing that low rates are necessary for growth and we should ignore inflation.  He is becoming a hate figure in the left-wing (“inflation: bad for workers”) and right-wing press (“inflation: bad for savers”), so he must be doing something right.

Paul Krugman better stay out of Britain, or else he might be surrounded by an angry mob of left-wing union workers that opposes his high inflation policies.  Come to think of it, I’d better stay out to.

Update:  Marcus Nunes has a post showing that much of the recent inflation increase in Britain is the VAT increase.

If I knew my “wheel” post would attract so much attention, I would have spent more time on it.  And BTW, perhaps it should be called the Sumner/Tarko model, as the commenter who drew several graphs for me kept insisting on labeling it his way, not mine.  Of course intellectuals are mesmerized by pretty baubles, so it was his model they critiqued, not mine.  That’s not to criticize Tarko, I admire his spunk. 

Seriously, here are a few points to keep in mind:

1.  Social science models are useful precisely because they are ad hoc, not universal.

2.  Social science models are useful only if inaccurate, i.e. simplifications of reality.

Thus I’m not concerned about whether my wheel leaves out some Americans, or even 299,000,000 Americans, I’m interested in whether it illuminates some aspect of our complex political terrain in a new and useful way.  That is all.

Obviously the Nolan Box is two dimensional, allowing much more realism than my basically one dimensional line.  So let me try to better explain what I was trying to do, and why I find it illuminating, even if no one else does. 

Let’s start with philosophy.  There is an age old-split between consequentialist/utilitarian and deontological approaches to ethics.  But I think many people lose sight of that fact that a large share of the public simply rejects both approaches, or perhaps I should say carves out a much larger role for selfishness than most well-intentioned ethics philosophers.  Many average people I talk to think both approaches are for suckers.  I called that approach ‘corrupt,’ which is a misleading term—we are all corrupt to some extent.  Like almost everything in the social sciences, I see this as a matter of degree.  In any case I came up with three moral perspectives; consequentialist, which I will simply call utilitarian, deontological (which is often associated with moral realism), and selfishness.

Then I realized that political battles are often binary fights between two poles.  For me, the most interesting fight among utilitarians is between those who think that aggregate well-being is maximized with a relatively small government and those who think it is maximized with a relatively large government.  But maybe that’s because I am an economist.  As I said, it’s ad hoc, and I’m happy with that.  As an aside I do understand that many of my fellow pragmatic libertarians don’t like being called utilitarian, and undoubtedly we are all a mixture of utilitarian and deontological impulses.  But when I see them debate issues, I mostly see utilitarian arguments.  Not exclusively, Greg Mankiw talks about “just deserts,” but mostly.  These are tendencies, not hard and fixed categories.

Among those with a natural rights perspective, the most interesting split that I see is between those who focus almost single-mindedly on liberty, and those (conservatives), who incorporate a wide range of natural rights and obligations, involving patriotism (the draft, muscular foreign policy), religion (views on sex, the sanctity of the body, selling organs), traditional family structure, paternalism (views on drugs and gambling), etc.  At times tribalism also plays a role (as with immigration.)  Conservatives believe that some cultures are objectively better than others.  Of course all the issues I’ve just discussed can also be addressed from a utilitarian perspective.  But when you do so, the political outcomes are very different.  For instance the very utilitarian Swedes see women as the victims of prostitution, and thus prosecute the “Johns” not the prostitutes.

Among the selfish there are two polar extremes of interest, those who favor the special interests of groups that benefit from progressivism, and a much more complicated “big tent” called the Republicans, who favor the special interests of fans of small government and low taxes, of cultural conservatives, and of foreign policy conservatives.  I see the Dems as basically utilitarian at the idealistic or intellectual level and the GOP as including quite a diverse mixture of libertarians, cultural conservatives and neocons.  I know that is unbalanced, giving more positions on the wheel to the right than the left, but that’s how I see American politics.  If I wanted to be symmetrical I’d add groups on the left that hate inequality so much they’d impoverish everyone to avoid it, or that favor the environment over human well-being.  But I like simplicity, and I’ve included the groups that I tend to encounter most often.

Here’s what I find useful about my wheel.  I can talk to each of the two groups that I am adjacent to for hours, agreeing on one political point after another.  Also agreeing about who the bad guys are.  Both groups would walk away from me thinking I am “‘one of them.”  But if those two groups tried to talk with each other, say Ron Paul and Matt Yglesias, Paul would walk away thinking Yglesias had no principles, and Yglesias would think Paul is a complete idiot.

At each step along the wheel similar “adjacent affinities” come into play.  Here’s Matt Yglesias talking with Tyler Cowen.  It seems like every sixty seconds Matt says “That’s right.”  And I’m sure Yglesias has nice conversations with highly partisan Dems on Capital Hill.  Of course the conversations between the Dems and GOP on Capital Hill are a bit strained recently (are we electing true believers?), but during most of my life they worked together on special interest deals, and were contemptuous about professors who came to lecture them on why a tax system with no loopholes is best for the country.

So as you move further away from your own position the views of others get further and further away from your own, until you suddenly come right back to where you started.  I suppose this isn’t exactly original.  People used to say that if one went to the most extreme left and the most extreme right, you ended up with Hitler and Stalin shaking hands.  But I find this three part model to be more interesting.  On one side you share a values affinity (selfish, natural rights and utilitarian), and on the other side you share an ideological affinity (conservative, progressive and libertarian.)

You may recall the famous New Yorker cover showing how Manhattanites view the country.  Consider this a similarly distorted perspective; how a pragmatic libertarian views the political landscape.  If only a few other pragmatic libertarians find this amusing, plausible, and/or useful, then so be it.

Jonathan Chait said I needed to go back to the drawing board.  He’s right.  I’ve produced one political model that might or might not illuminate one interesting aspect of our political terrain; now it’s time to develop another, equally ad hoc model.

BTW, Here’s the model with my official labeling (Sorry Tarko.)

                                                Progressives

–

–

Special interest Democrats                                              Pragmatic Libertarians

–

–

Special interest Republicans                                            Principled libertarians

–

–

                                                Conservatives

Will Vlad Tarko ever send me the model I favor?  Stay tuned.

PS.  My next political model will use string theory and involve 11 dimensions.

Mark Thoma recently took me to task for misinterpreting his post.  Here’s what Mark said:

It’s particularly amusing to see people saying that QEII raised employment in January when we know good and well that there are substantial lags in the policy process and it would be very unusual for monetary policy to work that fast. It would be just as easy to point to the recent tax cuts that Congress (surprisingly) put into place and give those credit for recent employment gains.

Knowing that Mark is a monetary stimulus skeptic, and a strong supporter of fiscal stimulus, I assumed his point was that even if the economy does pick up, how do we know it was monetary stimulus, not fiscal stimulus?  Several Keynesians have made that argument in my comment sections.   Then I went on to make a light-hearted joke about how Krugman doesn’t believe tax cuts are fiscal stimulus and Thoma does.

Now we find that two of the top Keynesian commentators don’t even agree on whether tax cuts count as stimulus.

Now he criticizes me for claiming that he said tax cuts had an expansionary impact, or at least I think that’s what I think he’s saying:

Sumner twisted my words on tax cuts. I didn’t say they were effective, I said that if one made the QE2 argument (which I was denouncing), one could just as easily make the tax cut argument. But I wasn’t actually saying the tax cuts had this impact (I also said fiscal policy could be given credit, but I guess Sumner ignored that because it didn’t fit the gotcha he wanted for Krugman.)   [emphasis added]

I never claimed he said tax cuts had this impact.  All I said was that the inference of his statement was that in some sense they “count” as stimulus.  He could have mentioned a million potential causes of employment rising in January, including the migratory pattern of birds or the orbit of Mercury.  The fact that he chose tax cuts, a well known Keynesian stimulus, and the fact that Mark is a highly respected Keynesian, led me to infer not that he was claiming tax cuts were effective in this instance, but rather tax cuts (and not bird migrations) are the sort of thing that might be capable of producing stimulus.  In contrast, the clear implication of Krugman’s post is that tax cuts are not a type of fiscal stimulus capable of boosting output, as he said fiscal stimulus had never been tried in this recession, and used spending data that ignored tax cuts to show that there had been no fiscal stimulus.  Anyway, the whole thing was obviously meant as a joke, the “cheap shot” heading was the tip-off that I found it amusing to see the apparent inconsistency.  I didn’t doubt that both have good reasons for their views, and wasn’t really trying to criticize either one.  If I was it would have been Krugman, not Thoma.  Most Keynesians believe tax cuts are stimulus.

Since we are on the subject of being misquoted, the following Mark Thoma statement isn’t exactly a misquotation, but comes close:

Or they are making the claim that those who said monetary policy is ineffective at the zero bound have been shown to be wrong?

Yes, he doesn’t even mention my name.  But isn’t it usual practice that when you link to someone’s post in the middle of a “making the claim” sentence, the post you link to does actually, you know, make that claim?  Check out my post and you’ll find I do not.  But I’m not going to get upset, because I do in fact believe the monetary ineffectiveness proposition at zero rates has been shown to be wrong, and have said that elsewhere.  And I’m pretty sure that Thoma has said elsewhere that tax cuts can be used as fiscal stimulus, which is all I was trying to say in the sentence that annoyed him.

So maybe we’re even now?  Anyway, it doesn’t matter, as bloggers misunderstand each other 100 times a day.  I’d say about 50% of all links to my posts involve misunderstandings, although that may be a reflection on my poor expository skills.

Mark Thoma also makes a substantive criticism of my views on lags.  This is from the quote up top:

It’s particularly amusing to see people saying that QEII raised employment in January when we know good and well that there are substantial lags in the policy process and it would be very unusual for monetary policy to work that fast.

It would be amusing to know who claimed QEII raised employment in January.  Mark then takes me to task:

“Cheap shots” are easy when you don’t understand the empirical evidence on the effects of policy,

Given that I’ve spent most of my life studying “the empirical evidence on the effects of policy” it is disappointing to find out that I don’t understand that evidence.  Let’s start with Gauti Eggertsson’s important article in the September 2008 AER, which shows how the powerful monetary stimulus of the spring of 1933 caused an almost immediate increase in prices and output.  (And Gauti cites not one but three of my papers—papers which discuss “empirical evidence” on money affecting prices and output.)   To be specific, after FDR took us off gold in the spring of 1933 the US saw a 57% increase in industrial production in 4 months, and a 14% increase in the WPI.  I’d guess that’s the fastest growth in AD in US history.  I don’t see any long and variable lags there.  Do you?  Now you could argue that’s dollar depreciation not QE, but didn’t rumors of QE depreciate the dollar in September-October 2010?

Mark Thoma cites Woodford’s assumptions about monetary policy lags:

1. First, I didn’t confuse peak effects with some effect. Sumner needs to look again at the empirical evidence. There is at least a one quarter lag before policy takes effects (and the delay is particularly long for inflation). You can find estimates saying anything, but there’s a good reason Woodford et. al. spent so much time trying to build a policy delay into their models. [Update: I should have given a reference. See Woodford’s book Interest and Prices, page 175 where he says “…there is a substantial real effect of the shock. … Furthermore, the effect occurs with a substantial delay; there is essentially no effect on output until the second quarter following the policy shock” Or, perhaps better, see the section in Chapter 5 called “Delayed Effects of Monetary Policy.”]

I have several questions about this.  First, how does Woodford identify monetary policy shocks?  If he uses changes in interest rates or the money supply, then I’d guess the shocks are misidentified.  Second, does he use post-war data?  If so, I’d guess the shocks are misidentified.  Third, does he use interest rates and postwar data?  If so, then I’m sure the shocks are misidentified.  Eggertsson is his co-author on several important papers.  What does Eggertsson think about Gauti’s work on the Great Depression?  Does Woodford know that commodity prices set in auction-style markets respond immediately to monetary shocks?  If they didn’t there’d be $100 bills all over the sidewalk.  If he knows this, how does he explain there being no immediate effect on inflation?  Don’t high commodity prices affect inflation?

Long-time readers know that I think it is far easier to identify monetary shocks in the interwar period than the post war period.  Fortunately for us, but unfortunately for the people back then, the government did lots of wild and crazy (read exogenous) things with monetary policy.  I’ve devoted half my life to studying these shocks.  And I see both prices and output responding very quickly on almost every clearly identifiable shock.  No long lags.

Now it’s fine if Mark Thoma disagrees, but I just want to make clear I am fully aware of the empirical evidence, including those post-war VARs that showed a price puzzle.  And my reading of the best evidence available is that monetary shocks (when clearly identified) have an impact on prices and output within a few months.

In one respect Mark Thoma was clearly justified in being annoyed.  I said:

He confuses peak effect, often estimated at 6 to 18 months, with some effect, which occurs almost immediately after major monetary shocks.

That was me jumping to conclusions.  Reading his new post it’s clear he wasn’t confused at all—he just has a different point of view than me.  So I’m sorry about that Mark.

HT:  Mark Sadowski