Blanchard and Leigh on the fiscal multiplier

Each year I look at the AER Papers and Proceedings, which comes out in May.  It provides short summaries of much of the most important research in the field of economics, presented at the annual convention in January.  In recent years there has been almost no discussion of the role of monetary policy in the Great Recession, indeed not much discussion of the Great Recession in any context.  The newest issue is a bit better on that measure, but fails in other areas.  This is from the intro of a paper by Olivier Blanchard and Daniel Leigh:

In the box published in October, we focused primarily on forecasts made for European economies in early 2010. The reason was simple: A number of large multiyear fiscal consolidation plans were announced then, particularly in Europe, and conditions for larger than-normal multipliers were ripe.

First, because of the binding zero lower bound on nominal interest rates, central banks could not cut interest rates to offset the negative short-term effects of a fiscal consolidation on economic activity. [This is from the working paper version.]

The study looked at 26 European countries, including 16 within the eurozone. Obviously there are two huge problems with their intro. Countries at the zero bound can easily offset the effects of fiscal austerity through unconventional monetary stimulus. But far more importantly, the vast majority of the countries in their survey were not in fact at the zero bound. Indeed they were engaged in raising interest rates at the very same time they engaged in fiscal austerity. So the entire study is based on a simple factual error, which the editors somehow overlooked.

And even countries at the zero bound, such as Switzerland, could and did engage in highly effective unconventional monetary stimulus.

It is true that those countries within the eurozone lacked an independent monetary policy.  But surely the key issue is how eurozone austerity affected eurozone NGDP as a whole.  (And yes, economists should look at NGDP to find multiplier effects, not RGDP.)  It doesn’t help the Keynesian cause if fiscal stimulus in Italy pushes Spain and Greece deeper into depression due to monetary offset resulting from the ECB’s 2% inflation obsession.

As far as monetary ineffectiveness, if they read the paper by Romer and Romer in the same issue they would have learned that being at the zero bound is no excuse, central banks have an obligation to use all tools available to meet their legal mandates.

There is little doubt that an overinflated belief in the power of monetary policy has contributed to some major policy errors.   .   .   .

In this paper, we present evidence that the opposite belief””an unduly pessimistic view of what monetary policy can accomplish””has been a more important source of policy errors and poor outcomes over the history of the Federal Reserve.

My mood brightened when I read Ryan Avent’s new post:

The comments above illustrate the point perfectly. “Policy hasn’t changed!” they all insist; “Markets just misunderstood us!” But that’s wrong. The market reaction is the policy.

Just as Canadians know much more about the US, than Americans know about Canada, bloggers know much more about academia than academics know about the blogosphere.  And with all due respect to the academics (I used to be one) I feel the blogosphere is a decade ahead on policy issues.  Academics talk like central banks are out of ammo, while bloggers discuss the unconventional actions that are driving markets in countries like Japan.  The real world.  Blanchard and Leigh would have gotten massacred in the blogosphere presenting the sloppy argument in their intro.



54 Responses to “Blanchard and Leigh on the fiscal multiplier”

  1. Gravatar of Pedro Pedro
    28. June 2013 at 15:33

    With all due respect Scott, plenty of people working with DSGE models are far from fitting into that caricature of academics. There is ample recognition of the many channels through which monetary policy can influence the path of spending, and consequently people are looking at a variety of ways they can incorporate those insights into their models.

    Now, a lot of those developments seem to hinge upon introducing financial frictions and examining the welfare properties of several different forms of Taylor-type rules. I say Taylor-type rules because they’d be nearly unrecognisable, ranging from rules that focus exclusively on the path for prices (i.e., price level targeting) to rules including macro-prudential policy, direct asset purchases and all sorts of other forms of unconventional policy. I don’t want to quote anyone because I’ve mostly seen stuff in the form of presentations, working paper drafts, etc.., but it’s fair to say there are a lot of people thinking well beyond the ‘interest rates are all that matter’ paradigm.

    Of course, a large fraction of academics still think along those lines, even in macro, and we are certainly in need of some figurative funerals, but I don’t think it’s fair to characterise debate in academia in that way. In fact, most people my age who are now completing or getting into doctoral programmes are keen blog readers and very familiar with people like you or Simon Wren-Lewis. In fact, out of all the disciplines I’ve come across, macro seems to have the highest fraction of students who actively engage with non-technical work and/or the blogosphere.

    So while Blanchard may still be peddling a line about monetary policy even my second year students, using only IS-LM, know to be wrong, it seems to me that the new generation won’t be carrying that baggage.

  2. Gravatar of ssumner ssumner
    28. June 2013 at 15:52

    Pedro, That’s good to hear. I suppose my post seemed like a blanket indictment of academia, which I agree would be foolish. My comment was directed specifically at the articles written by top academics that I’ve come across (liberal and conservative), and specifically their views on monetary policy.

    I don’t doubt that the next generation of academics will be much better read on blogosphere perspectives, and that’s why I say they are 10 years behind, not hopelessly behind. Your generation will fix things.

    I suppose this also reflects frustration on my part. I’ve been blogging for 4 1/2 years and in all that time no serious academic has ever told me why my views (on monetary effectiveness at the zero bound) are wrong. I feel like I’m fighting against a ghost, no one ever pushes back. The view that monetary policy is out of ammo at the zero bound used to be seen as a freshman mistake–why did so many top academics suddenly adopt that perspective when the crisis hit?

    Even worse, the central banks have never complained that they were out of ammo (except the Japanese and we now know that was a lie–they simply didn’t want to depreciate the yen.) So why did academics take that perspective?

  3. Gravatar of Pedro Pedro
    28. June 2013 at 18:12

    My guess is that those people who stand to lose more status from significant challenges to the status quo in terms of the policy rule are precisely those who are less open minded about unconventional monetary policy. Another plausible explanation (though I’m stretching it a bit and perhaps being unfair to some people) is that if you spend a lot of time doing work on fiscal multipliers and finding reasonably large estimates in the process, it may not be in your interest to argue that it doesn’t really matter anyway because monetary policy is enough to pin down the path of spending.

    I’m not so sure I’m terribly convinced by the latter, but I think there is a lot to be said about the former. Take the case of the Taylor rule, for example. Paul Levine and David Currie were doing work on optimal policies ( | well before Taylor’s contribution and in one of the papers even argued for ‘price level or nominal income rules rather than a monetary rule for the open economy’. This in 1985! I raised this issue because, having met Paul some time ago, I was struck by how unencumbered with his past contributions he seemed to be, and the fact that we now call them Taylor rules rather than Currie-Levine rules might well make these academics whose status wasn’t raised to the same extent less concerned with how new developments affect their reputation.

    Like I said, most of the people I’ve met who work in macro are avid blog readers and spend a lot more time, relative to other economists, reading blogs and opinion pieces of all kinds, as well as other institutional actors like central banks, IMF, BIS, etc.. I don’t quite understand the fixation with the ZLB; when teaching even the simplest IS-LM model it is pretty standard for us to lead students through the argument that higher expectations of inflation means you can always decrease real interest rates and push the IS curve outwards.

    I suppose the twin paradigm of Taylor rules and inflation targeting led to a fair number of people forgetting this earlier work on price level rules or nominal spending rules, and perhaps it could be argued that the great moderation made many theorists less concerned with thinking about ‘optimal policies’ in general; in many ways, the assumption was that it we had was good enough.

    So a mix of concerns about status eroding pushing of the frontier to some extent and complacency in terms of the state-of-the-art of macro models and their policy implications. A fair assessment?

  4. Gravatar of Steve Steve
    28. June 2013 at 20:05

    Well Krugman defended Obama’s “climate” policy based on the ZLB. He could have gone with externality approach and had a perfectly valid argument. But instead he argued that there wasn’t any cost at all because of the Keynesian liquidity trap.

    On a positive note, Larry Kudlow has been going market monetarist this week. I know you did a post on him a while back, but I finally decided to tune in and was pleasantly surprised.

    I wonder if Obama fired Bernanke for trying to offset the sequester, which led to the bubble pricking escapade the past few weeks. I worry that Obama wants a Fed that will try to embarrass Republicans in Congress and artificially create a large Keynesian/Obama multiplier.

  5. Gravatar of Benjamin Cole Benjamin Cole
    28. June 2013 at 21:13

    Did Sumner engage in mild hyperbole in describing and dismissing the economics profession and especially academia?

    No, Sumner did not go far enough. The profession is hidebound, encrusted, ossified, agenda-driven, even coprolitic.

    I mean, how long has been been red-kights flashing, klaxons-ringing, glaringly obvious that the Fed needs to print a lot more money?

    And for how long have the lessons of Japan been obvious? (BTW Milton Friedman wrote his “The BoJ needs to buy bonds to the moon” article, for the Hoover Institution at Stanford, in 1998. That is 15 years ago.

    If a profession cannot find its way out of thicket in 15 years…yes, I think the descriptions of “clueless, model-bound, turf-protecting, slow, frozen, petrified” and more are warranted.

    The shining exception to this has been the blogs, who have completely erased the old academic publishing system, or peer-reviewed quarterly journals and annual meetings, as the place to become informed. Let them harrumph and preen their feathers. If it wash;t so serious, it would be comic.

  6. Gravatar of Mikio Mikio
    28. June 2013 at 23:32


    If monetary policy can offset fiscal austerity, why is the UK economy performing so miserably – the BOE is doing QE after all, and without any tapering discussion worth mentioning…

    I really wonder,

    Regards, Mikio

  7. Gravatar of ssumner ssumner
    29. June 2013 at 04:55

    Pedro, Very good points. In my view many economists put too much weight on the “transmission mechanism” role of interest rates, and not enough on the “signaling role.” If they had read Nick Rowe, they would have understood that the Fed could simply shift to a different signaling device, one without a zero bound. But if you think in terms of transmission mechanism, than you need to focus on changing inflation expectations, or NGDP growth expectations. That seems like a much more radical shift, and lots of economists failed to make it.

    Steve, Good point about Krugman. I doubt Obama has that plan, as the President is always hurt much more by a bad economy than the party that controls Congress, much less only one house of Congress.

    Mikio, First of all you need to define “bad”. Inflation is running far above target over the past 5 years, employment has hit one record after another, even as American employment lags 3 million below the peak. The Keynesian model suggests that this means the UK does not have an AD problem. Is that what Keynesians believe?

    Most people think the UK is doing poorly because of RGDP data, but RGDP data is both inaccurate and has little bearing on AD. If the UK has supply-side problems causing falling RGDP despite record employment and high inflation, there’s nothing that fiscal or monetary stimulus can do about that problem.

    Having said that, I do agree that NGDP growth has been too slow in recent years. But even Ed Balls, who leads the Labour Party on economic issues, opposes a higher inflation target. How do you get higher NGDP growth without higher inflation, when your inflation rate is already far above target?

    As far as QE, I’ve NEVER, ever argued that QE is a good measure of whether money is easy or tight. Just that QE is better than no QE, if looking at a particular policy choice of a central bank. Like low interest rates, QE is usually an indication that money has been tight in the past.

  8. Gravatar of Blanchard and Leigh on the fiscal multiplier « Economics Info Blanchard and Leigh on the fiscal multiplier « Economics Info
    29. June 2013 at 06:00

    […] Source […]

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. June 2013 at 06:48

    It’s not just the economics profession. I remember once seeing a line something like, ‘One can read almost the whole of Victorian literature without encountering a single reference to an activity without which the human race would become extinct.’

    I’ve also been encountering something along those lines this week following the doings in the George Zimmerman trial. As the prosecution parades witness after witness to the stand who end up supporting the defense’s theory of the case and contradicting the prosecution’s, it is obvious there was never a case against it being self-defense. Yet, I haven’t heard a single paid legal commentator say out loud that the prosecutor doesn’t expect to win, just to get a certain political element off his case.

    Etiquette is often odd.

  10. Gravatar of Mikio Mikio
    29. June 2013 at 07:22


    thank you very much for the brief summary.

    I must admit I didn’t looked closer at the UK economy recently (beyond RGDP), so that was really helpful.

    What you are saying is essentially that without the BOE the UK’s economy performance would have been closer to Southern Europe’s.

    It will be interesting to see what happens next, with the BOE under (perhaps slightly hyped-up) new management.

    Best regards,


  11. Gravatar of ssumner ssumner
    29. June 2013 at 07:51

    Patrick, Good analogy.

    Mikio, Yes, If Britain has been in the euro, it would be in a depression right now. The euro has been stronger than the pound.

    King was outvoted at the BoE, so it remains to be seen whether Carney will be able to do any better. What he really needed was a stronger mandate, and he didn’t get it.

  12. Gravatar of Nick Nick
    29. June 2013 at 08:25

    Scott, the perfect job vacancy for you:

    Just a piity they are asking for senior banking experience. They just dont know who they need yet.

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. June 2013 at 09:43

    Just reading the Blanchard and Leigh paper very quickly it seems that they do estimate an equations under “liquidity trap” conditions where they define a country as being in a liquidity trap if the central bank policy rate is *ever* 1% or below in 2010 or 2011. For this exercise their sample includes the 26 countries plus 10 other advanced countries less 13 countries that do not satisfy their definition of a liquidity trap. Thus the “liquidity trap” regression includes 23 countries 16 of which are in the eurozone.

    Putting entirely aside the fact that their definition of liquidity trap is amazingly generous (as you recall there was a period of time in 2011 when the ECB raises the MRO rate to 1.5%), by far the bigger problem is that their sample is biased by having over two thirds of the sample members from a single currency area (the eurozone) and hence subject to the same exact monetary policy.

    (As I think you once said, raising government spending in Fargo, North Dakota indeed raises GDP….in Fargo, North Dakota.)

    Since the 16 eurozone members are an outsize proportion of the samples used in all the equations that they estimate, this problem is pervasive to all of the paper’s results.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. June 2013 at 09:56


    Actually 15 eurozone members are in the samples as both Estonia and Luxembourg were excluded owing to the unavailability of IMF WEO data. That’s still a lot of countries from the same currency area.

  15. Gravatar of TGGP TGGP
    29. June 2013 at 10:41

    “And with all due respect to the academics (I used to be one)”
    Have you retired already?

  16. Gravatar of marcus nunes marcus nunes
    29. June 2013 at 10:54

    Instead of listening to the “academics”, the Fed should listen to “the grapevine”:

  17. Gravatar of Bill Ellis Bill Ellis
    29. June 2013 at 12:17

    Nice smack down. And you are absolutely right about the blogosphere.

    I think that the blogosphere is way out a head of not just econ academia, but most of the “establishment” “knowledge” institutions.

    Wonder why Gay rights took such a sharp turn ? How about the GOP’s inability to “white water” Obama they way they did Clinton ? How’d Obama-care get passed ? I could go on and on with examples and the reason for all of them is the same…
    Netizens work the blogosphere. Then blogosphere works the establishment press.

    The establishment is still reeling… They can buy and program a “news” network to promote their agenda to the passive info consumer… but they can’t figure out how to herd the loud-obnoxious-always talking-authority disregarding- truth seeking masses on the internet…Yet.
    Not yet.

    Now i, I fear, the golden age of egalitarian information distribution. It will not last if the establishment get’s their way.

    Socialize information.

  18. Gravatar of Saturos Saturos
    29. June 2013 at 16:11

    The new Gavyn Davies piece comes recommended from Tim Duy:

    And Tyler links to this piece on Twitter as an advertisement for flexible labor markets, however… well, read it yourself:

  19. Gravatar of JimP JimP
    29. June 2013 at 19:21

  20. Gravatar of jknarr jknarr
    29. June 2013 at 21:51

    Academics are somewhere between sorcerers and evil counsellors, I should think. Krugman definitely a falsifier. Blogosphere around wrathfully and heretic – so closer to heaven, thank goodness.

  21. Gravatar of AldreyM AldreyM
    30. June 2013 at 04:05

    I don’t think that 2% of inflation is too high. but yes, the problem with the UK is mostly due to supply-side factors.

  22. Gravatar of AldreyM AldreyM
    30. June 2013 at 04:28

    UK NGDP:

  23. Gravatar of AldreyM AldreyM
    30. June 2013 at 05:34

    FDR’s policies prolonged Depression by 7 years, UCLA economists calculate

  24. Gravatar of OhMy OhMy
    30. June 2013 at 07:27

    “Countries at the zero bound can easily offset the effects of fiscal austerity through unconventional monetary stimulus.”

    Experience shows they can’t. Unless you invoke Confidence and Expectations Fairies. The Fed waves a wand: “hey, you income is dropping and your taxes are increasing but DO expect higher GDP, against algebra!”.

  25. Gravatar of W. Peden W. Peden
    30. June 2013 at 08:16


    Has the Bank of England struggled to get inflation up to target during the UK’s austerity programme?

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. June 2013 at 08:42


    Off topic but I guest posted on Andolfatto’s blog, and since I quoted you I thought you ought to know:

  27. Gravatar of Negation of Ideology Negation of Ideology
    30. June 2013 at 10:36

    OhMy –

    You seriously believe the Fed can’t raise NGDP without the confidence fairy? So if the Fed bought the entire national debt, all the mortgages and student loans in the country and all state and local debt NGDP wouldn’t increase? What if the Fed bought all the assets in the country? What if it bought all the assets in the world?

  28. Gravatar of W. Peden W. Peden
    30. June 2013 at 10:55

    Negation of Ideology,

    That would just be an asset swap.

  29. Gravatar of Mike Sax Mike Sax
    30. June 2013 at 11:17

    Krugman tips his hand on his choice to succeed Bernanke

  30. Gravatar of Geoff Geoff
    30. June 2013 at 11:21

    Government-backed mortgage bonds are falling fast…

    From Bloomberg:

    “Government-backed U.S. mortgage bonds are poised for their largest quarterly loss in almost two decades, with some of the debt extending declines today.

    “What just occurred is indicative of just how important QE is,” Brad Scott, Bank of America’s New York-based head trader of pass-through agency mortgage securities, said today in a telephone interview.

    The Fed’s current buying provided demand as other investors retreated and has grown as a percentage of forward sales by originators tied to new issuance, which is set to fall as higher rates reduce refinancing, according to Scott.

    “The Fed, at times during this period, was the only outlet in terms of demand for securities,” he said.

    [Geoff: Does anyone here know what happens to security (bond) prices if the demand for them falls to zero?]

    The mortgage-bond losses rival the 2.3 percent declines in the first quarter of 1994 amid a slump in debt prices sparked by the Fed unexpectedly raising its target for short-term interest rates on Feb. 4 of that year, the first of seven increases totaling 3 percentage points. Fortune magazine at the time declared it a “bond market massacre.”

    Home-loan debt without government backing has also been damaged. Subprime-mortgage securities have lost about 2 percent this quarter, including a 4.9 percent drop this month, according to Barclays Plc index data.

    The plunge in mortgage-bond prices has sent borrowing costs soaring to the highest since July 2011. The average rate for a 30-year fixed mortgage rose this week to 4.46 percent from 3.93 percent, the biggest one-week increase since 1987, according to Freddie Mac surveys.

    The underperformance is tied partly to the way in which the lifespan of mortgage securities extends as projected refinancing declines, as well as the potential slowing of the Fed’s buying in the market.

    The rout has been exacerbated by sales by real-estate investment trusts and other firms that rely on borrowed money that are seeking to pare rising leverage ratios, as well as adjustments tied to changes in the expected lives of the debt, a dynamic known as convexity, according to analysts from Credit Suisse Group AG to JPMorgan Chase & Co.

    Now, Fidelity’s Irving said, “what was once deemed QE Infinity is no longer viewed that way.”

  31. Gravatar of Saturos Saturos
    30. June 2013 at 12:35

    Tyler’s ice cream analogy:

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. June 2013 at 12:55

    Mike Sax,

    Your blog post reads:

    “I’ll tell you what: if Geithner is seriously campaigning for Bernanke’s job, this article hurts him after the White House reads Krugman’s piece. This also provides shot in the arm to Romer. It also establishes her as the choice of the hawks and Geithner of the doves.”

    Don’t you have that precisely backwards?

  33. Gravatar of marcus nunes marcus nunes
    30. June 2013 at 13:41

    Ohanian is a die-hard RBC theorist:

  34. Gravatar of JimP JimP
    30. June 2013 at 14:29

    and BANG goes the euro

  35. Gravatar of Max Max
    30. June 2013 at 17:54

    Negation, “You seriously believe the Fed can’t raise NGDP without the confidence fairy? So if the Fed bought the entire national debt, all the mortgages and student loans in the country and all state and local debt NGDP wouldn’t increase? What if the Fed bought all the assets in the country? What if it bought all the assets in the world?”

    Up to the point where it ceases to be costlessly reversible, buying stuff should have little effect (since it’s nothing the financial sector can’t undo, making it irrelevant to the real economy).

  36. Gravatar of Mattias Mattias
    1. July 2013 at 00:22

    “The market reaction is the policy.”

    If Hamlet hade lived today he might have said

    “Is,” madam? Nay, it seems. I know only “seems.”

  37. Gravatar of Blanchard and Leigh on the fiscal multiplier | Fifth Estate Blanchard and Leigh on the fiscal multiplier | Fifth Estate
    1. July 2013 at 03:12

    […] See full story on […]

  38. Gravatar of Coleton Stirman Coleton Stirman
    1. July 2013 at 05:24

    Forbes continues it’s crusade against market monetarism, calling it “governmental counterfeiting of our dollar” and “Missed by this hopelessly deluded religion is that by their definition of deflation, serial devaluers of the Zimbabwe and Argentina variety have historically had massive amounts of their currencies in circulation.”

    Looks like they are a bit nervous over at Forbes:

  39. Gravatar of ChargerCarl ChargerCarl
    1. July 2013 at 07:46

    ^its just John Tamny who’s a hack

  40. Gravatar of Robert Robert
    1. July 2013 at 08:05

    Seems like the results are being driven by 2009 and a bit by 2010. But little thereafter. Also, size of multiplier is very small compared to what some might have expected.

  41. Gravatar of W. Peden W. Peden
    1. July 2013 at 09:25

    “If we want a Reagan-style recovery”

    If the US had the kind of economic stats they had under Reagan, he’d go ape about hyperinflation.

  42. Gravatar of TallDave TallDave
    1. July 2013 at 11:11

    What if it bought all the assets in the world?

    At moments like this I fervently hope that somewhere, someone has written a novel about a dystopian future where the Fed owns everything 🙂

  43. Gravatar of Saturos Saturos
    2. July 2013 at 04:00

    The Bank of Japan has been listening to Miles Kimball on an electronic Yen:

  44. Gravatar of Saturos Saturos
    2. July 2013 at 04:01

    TallDave, check the Mises Institute library, it’s gotta be in there somewhere.

  45. Gravatar of TravisV TravisV
    2. July 2013 at 05:58

    Kelly Evans just promoted NGDP futures markets on Squawk on the Street! She specifically cited Dr. Sumner and Dr. Christensen. Jim Cramer said he’s all for it!

  46. Gravatar of Saturos Saturos
    2. July 2013 at 12:44

    This Chinese student does not take Scott’s benign view of the country’s house prices:

    Travis, wow, guess that interview he gave her a couple years ago paid off! As did Scott’s respect for all of his commenters…

  47. Gravatar of RyGuy Sanchez RyGuy Sanchez
    2. July 2013 at 13:20

    About to tear my hair out reading the latest Feldstein piece “The Fed Should Start to ‘Taper’ Now” in the Wall Street J.

    >Reaching the Fed’s GDP forecast for this year requires the growth rate to jump to more than 3% in the third and fourth quarters. It is difficult to see how this can happen. U.S. exports are declining in response to weaker growth in other countries and a stronger dollar. The sequester and the higher tax rates that took effect on Jan. 1 will continue to reduce aggregate demand.

  48. Gravatar of Steve Steve
    2. July 2013 at 19:32

    “Kelly Evans just promoted NGDP futures markets on Squawk on the Street”

    Kelly Evans also co-anchored the Kudlow show. Larry Kudlow is another budding convert to market monetarism.

  49. Gravatar of ssumner ssumner
    3. July 2013 at 05:38

    Everyone, Thanks for all the links.

    Mark, Thanks for the correction.

    TGGP, Well I’m still being paid as one.

    Bill, Yes, information wants to be free.

    Saturos, Good Davies piece. I strongly favor flexible labor markets, especially when you consider the alternative (Spain and Greece.)

    Aldrey, I made a similar claim back in the 1990s. Yes, the NIRA delayed recovery for 7 years.

    OhMy, No fiat central bank ever tried to inflate and failed. Not once.

    JimP, I don’t think France will leave the euro, but anything is possible.

    Coleton, Tamny has a history of saying wacky things. He doesn’t understand what MM is all about.

    Thanks Travis.

    RyGuy, That’s an awful piece.

  50. Gravatar of Bill Ellis Bill Ellis
    3. July 2013 at 12:53

    ‘Keynesian economists have never been able to accept my assertion that the fiscal multiplier is roughly zero because the Fed steers the (nominal) economy.’

    Now, I do admit that this sentence could mean several things! Let’s consider three claims that could be represented by this statement:

    Possible Claim 1: Because monetary policy can act in opposition to fiscal policy, the effect of fiscal stimulus depends crucially on how the Fed reacts to a stimulus.

    Possible Claim 2: The data show that, in practice, the Fed does act to negate the effects of fiscal stimulus.

    Possible Claim 3: Because the Fed can, in theory, counteract any fiscal stimulus, the effect of any fiscal policy on output should be considered to be zero.

    Is he putting words in Scott’s mouth ?

  51. Gravatar of Bill Ellis Bill Ellis
    3. July 2013 at 13:48


    “BUT, aha! Possible Claim 3 also involves a theoretical claim. This is the claim that (3b) the Fed’s reaction function is invariant to fiscal policy! To see why, consider a world in which the Fed targets a 3% growth rate for NGDP if there is no stimulus, but raises the growth rate target in the event of a stimulus. In this case, it would make perfect sense to say “fiscal stimulus increased NGDP growth,” in the sense that we normally think of causality. It would make no sense to attribute the growth increase to the Fed. That would be like saying “You think you put butter on that piece of toast, but actually it was I who put butter on that piece of toast, since I could have clobbered you on the head and stopped you from putting butter on the toast, and I chose not to. Thus, you are incapable of buttering toast; only I can butter your toast.” That would be a truly batty claim!

    And it was this claim, Possible Claim 3, that I believed Sumner to be making…. When I go back and read that sentence again, it still sounds like Claim 3b, but that could be my minsinterpretation. Perhaps Sumner was only making a combination of Possible Claims 1, 2, and 3a…. And if this was the totality of what he was saying, then I was indeed mistaken in bringing out Bat Boy…. So perhaps I was too quick to say that Sumner’s claim was batty. It was simply the case that the claim I thought Sumner was making would, in fact, be batty.

  52. Gravatar of Negation of Ideology Negation of Ideology
    3. July 2013 at 15:37

    “This is the claim that (3b) the Fed’s reaction function is invariant to fiscal policy! To see why, consider a world in which the Fed targets a 3% growth rate for NGDP if there is no stimulus, but raises the growth rate target in the event of a stimulus.”

    Wow. So now the Keynesian claim is that fiscal policy works by getting the Fed to change its target? And he’s calling Scott batty?

  53. Gravatar of ssumner ssumner
    4. July 2013 at 06:42

    Thanks Bill, I left a reply.

  54. Gravatar of Friday Links | Meta Rabbit Friday Links | Meta Rabbit
    5. July 2013 at 02:05

    […] 4. From a post about the IMF & Academia: […]

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