End stupid monetary policy debates

As I see it, there are two types of debates over real world monetary policy. In one debate, one side says monetary policy is obviously way off course. The other sides concedes that aggregate demand (AD) is not where we’d like it, but suggests there’s not much the central bank can and/or should do about it. These are stupid debates. In the second kind of debate, reasonable people will disagree as to whether growth in AD is likely to be excessive or inadequate going forward. These are intelligent debates.

I can’t emphasize enough that you do not want to live in a time where the first type of debate is occurring. Those are bad times, at least regarding monetary policy. And not just bad, obviously bad. People sometimes claim that there are periods where asset prices are obviously wrong (usually excessively high.) Actually, those asset price bubbles do not exist. But there really are times where monetary policy is obviously off course, as we don’t have the sort of NGDP future market targeting that would prevent those policy fiascos.

What are some examples of periods where monetary policy is obviously way off course? At a minimum, I’d say 1930-35, most of 1968-81 and 2009-14. That’s not to say there aren’t plenty more periods where monetary policy was off course in my opinion, I’m just listing a few periods where it’s patently obvious that either more AD or less AD would have been desirable.

Jay Powell’s Fed has given us reasonable monetary policy. Lots of Keynesian economists seem to think the economy would benefit from more AD. That view is certainly implicit in concerns expressed that the expiration of the $300 bonus payments in the unemployment insurance program will reduce AD. Larry Summers has a recent piece that suggests that monetary policy is too expansionary, i.e., that AD will be excessive going forward. That’s an intelligent debate.

It’s really nice to live in a world where this sort of intelligent debate is taking place. We need a monetary regime where the first type of debate never occurs. We need to do whatever it takes to avoid a situation where everyone agrees the economy needs more AD, or less AD, but people doubt whether the Fed can or should address the problem. The Fed always can and should address the problem—if we are debating that issue then we are in a very dysfunctional place.

My dream is that I never again see the sort of policy debate we had during the Great Depression, the Great Inflation, or the Great Recession, where almost everyone believes that more or less AD would be helpful, but most people don’t want the Fed to do anything about it.

End stupid monetary policy in order to end stupid monetary policy debates.



36 Responses to “End stupid monetary policy debates”

  1. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. August 2021 at 09:32

    Discussion of AD is good. Unfortunately, Powell doesn’t believe in such a metric.

    Maybe the FED should target the U.S. $ relative to other countries (as opposed to interest rates)?

    How can the FED be transparent? The FED is flying in the dark. It has no model in which to judge the level of inflation (as Powell said: “In seeking to achieve inflation that averages 2 percent over time, we are not tying ourselves to a particular mathematical formula that defines the average”).

    Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “There’s no certainties, but I think the inflation risks are graver than those that the chairman recognized.”

    And Powell gives the 70’s inflation as an example of non-transitory inflation (“Forty years ago, the biggest problem our economy faced was high and rising inflation”) (https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm

    That’s absurd. We can forecast inflation. But not according to Powell; “Our decisions about appropriate monetary policy will continue to reflect a broad array of considerations and will not be dictated by any formula”.

    Powell: “Some slowing in growth relative to earlier decades was to be expected, reflecting slowing population growth and the aging of the population.” So much for NARIU (“non-inflationary rate of unemployment”) and the Phillips Curve (trade-off between inflation and unemployment), or “u-star,” the natural rate of unemployment.

    Contradictory to its mandate: (1) “We continue to believe that specifying a numerical goal for employment is unwise, because the maximum level of employment is not directly measurable and changes over time for reasons unrelated to monetary policy.” (2) “By reducing our scope to support the economy by cutting interest rates, the lower bound increases downward risks to employment and inflation.”

    Powell: “More troubling has been the decline in productivity growth, which is the primary driver of improving living standards over time”

    You don’t get multifactor productivity (MFP), which we desperately need, unless we get higher levels of CAPEX. And we don’t get higher levels of CAPEX without higher levels of R-gDp (profit expectations).

    Powell: “Estimates of the neutral federal funds rate, which is the rate consistent with the economy operating at full strength and with stable inflation, have fallen substantially, in large part reflecting a fall in the equilibrium real interest rate, or “r-star.” (a moving target).

    There’s no such thing as R *. Investment hurdle rates are idiosyncratic. Powell provides imaginary figures because the FED doesn’t have a concrete model, aka, “inflation expectations”.

    How can you have a “longer-run goal”, without a plan?

  2. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. August 2021 at 09:37

    According to Powell’s definition, the hyperinflation affecting the German Papiermark, the currency of the Weimar Republic, between 1921 and 1923, primarily in 1923 was transitory too.

  3. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. August 2021 at 10:48

    Remember that AD = money times transactions’ velocity, not N-gDp (as the Keynesian economists claim).

  4. Gravatar of Philo Philo
    28. August 2021 at 10:54

    “End stupid monetary policy in order to end stupid monetary policy debates.” Well, there are more compelling reasons to end stupid monetary policy!

  5. Gravatar of bill bill
    28. August 2021 at 11:45

    Powell’s moves in March and April 2020 are really commendable. Even brilliant. It’s easy to imagine a counterfactual where he lets the economy collapse and people make the argument that monetary policy can’t cure covid.

  6. Gravatar of David S David S
    28. August 2021 at 13:01

    I think Larry’s article, and the position he takes, was out of date before it went to press, but I will grudgingly give him some credit for basing his arguments on a reasonable model. He’s worried that the Fed will act too late, or lack the resolve to act aggressively enough. His position may gain credibility if PCE is elevated 18 months from now. That scenario seems unlikely if the Fed starts tapering soon and does some rate hiking if conditions warrant it.

    I’m getting tired of seeing headlines about the Fed causing another housing market bubble. The burning question is whether or not Trump’s reinstatement as president on August 31st will unleash the animal spirits that will instantly reform zoning laws and resolve the microchip shortage.

  7. Gravatar of Michael Sandifer Michael Sandifer
    28. August 2021 at 16:36

    Bill, yes, monetary policy during this recession seems to be about the best we’ve had. Of course, the Fed didn’t cause this recession, so there’s that too.

  8. Gravatar of ssumner ssumner
    28. August 2021 at 19:11

    I’m pretty happy with Fed policy, but I do think there’s a reasonable chance that Summers is correct. I’m just glad we are having this debate, and not the other one.

  9. Gravatar of rinat rinat
    28. August 2021 at 19:21

    Just end he Fed!

    Problem solved.

    No more losers trying to plan our currency for their own personal gain.

    It’s the greatest ponzi scheme of all time.

    Permits banks to lend without any risk. If they lose, just bill the tax payer.

  10. Gravatar of Ralph Musgrave Ralph Musgrave
    29. August 2021 at 03:20

    There’s a simple reason monetary policy, at least in the form of artificial interest rate adjustments, are nonsense: those adjustments are ARITIFICIAL.!! The normal assumption in economics is that the GDP maximising price of anything, absent good reasons for thinking otherwise, is the free market price. Ergo the GDP maximising rate of interest is the free market rate, not some artificial central bank imposed rate.

  11. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. August 2021 at 06:12

    “The Social Security cost-of-living adjustment for 2022 could be 6.1% due to inflation, according to a new estimate. That would be the biggest increase since 1983, according to non-partisan advocacy group The Senior Citizens League, which calculated the figure.”

  12. Gravatar of Ryan Ryan
    29. August 2021 at 12:21

    Hi Scott, I realize this isn’t the main point of your post, but you did single or Summers in the post and in a comment. I suppose I’m surprised you give any weight to Summers’ comments given he states in the third paragraph that “Quantitative easing is a policy of creating money…”. Isn’t this statement patently false, since only borrowing creates new money, and QE is just an asset swap? It’s possible he’s only using the words “money creation” because he doesn’t want to get too technical for a general audience, but if that’s the case, the word choice seems deliberately meant as a scare tactic. So whether he doesn’t understand QE, or is trying to spin the debate, his OpEd doesn’t like a beneficial contribution to a healthy debate.

  13. Gravatar of ssumner ssumner
    29. August 2021 at 16:42

    Ralph, I’m hoping you aren’t the same Ralph Musgrave who commented here a few years ago.

    Central banks do not impose artificial interest rates.

    Ryan, No, QE does create money.

  14. Gravatar of Ralph Musgrave Ralph Musgrave
    30. August 2021 at 00:58

    Scott, Simply stating that “central banks do not impose interest rates” is not an argument any more than saying “the Earth is flat” is an argument for thinking the Earth is flat.

  15. Gravatar of Jeff Jeff
    30. August 2021 at 05:34

    Is “what almost everyone believes” something like “I only know one person who voted for Nixon”?

  16. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. August 2021 at 07:26

    “On the Fed’s balance sheet in recent months, the sum of Fed asset purchases and Treasury withdrawals has been offset closely by the increase in the usage of the ON RRP facility”

    And “The Lag from Monetary Policy Actions to Inflation: Friedman Revisited” 2002

    “We reaffirm Friedman’s result that it takes over a year before monetary policy actions have their peak effect on inflation… Similarly, advances in information processing and in financial market sophistication do not appear to have substantially shortened the lag”

    “At the Dec. 27–29, 1971, American Economic Association meetings, Milton Friedman (1972) presented a revision of his prior work on the lag in effect of monetary policy (e.g. Friedman 1961). His new conclusion was that ‘monetary changes take much longer to affect prices than to affect output’; estimates of the money growth/CPI inflation relationship gave ‘the highest correlation… [with] money leading twenty months for M1, and twenty-three months for M2’ (p. 15)”

    AD = M*Vt. If the FED keeps stoking the money stock, then inflation will rise again to another new peak. But short-term money flows are decelerating. That spells stagflation.

  17. Gravatar of ssumner ssumner
    30. August 2021 at 20:29

    Ralph, Years ago, someone named Ralph Musgrave commented here frequently. Are you that Musgrave?

    In the right margin I have links to a short course in monetary economics.

    Jeff, No.

  18. Gravatar of Sven Sven
    31. August 2021 at 03:19

    Do you think it is the monetary policy or fiscal policy that keep aggregate demand at equilibrium with aggregate supply given the persistent zero lower bound interest rate environment?
    I think this question is fundamentally important for the long term AD. I don’t think monetary policy is sustainable in terms of keeping AD at equilibrium in the long run.

  19. Gravatar of Carl Carl
    31. August 2021 at 08:46

    Is the question of whether quantitative easing contributes to fiscal profligacy a stupid debate topic? I look at the following graphs and wonder whether the problem isn’t just that Federal government budgeting is dysfunctional but that the Fed may be facilitating the dysfunction: https://fred.stlouisfed.org/graph/?g=Gss3 and https://fred.stlouisfed.org/series/HBFRGDQ188S.

  20. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    31. August 2021 at 13:21

    “the record surge in rents will soon appear on official data – unless it is dramatically revised and manipulated – leading to what may may be an OER print north of 5% as soon as December”

    All the “basic human needs” prices are increasing rapidly (“Many modern lists emphasize the minimum level of consumption of “basic needs” of not just food, water, clothing and shelter, but also sanitation, education, and healthcare”)

  21. Gravatar of ssumner ssumner
    31. August 2021 at 13:45

    Sven, I think just the opposite; monetary policy is far more sustainable than fiscal policy.

    Carl, I don’t think it’s a stupid topic, but I don’t agree that QE encourages fiscal profligacy. For that I blame Congress.

  22. Gravatar of agrippa postumus agrippa postumus
    31. August 2021 at 13:54

    economist manque sumner slips in, furtively, “actually, those asset price bubbles do not exist”. is his money where his mouth is? is his brain where his….

  23. Gravatar of Sven Sven
    1. September 2021 at 04:23

    Your argument is true in normal times. However, I don’t think it is after 2008 due to savings glut while interest rates around zero even in some countries at negative levels.
    In The Long Run, How far monetary policy can go? I don’t think it is a sustainable policy.

  24. Gravatar of ssumner ssumner
    1. September 2021 at 10:13

    agrippa, You asked:

    “is his money where his mouth is?”


    Sven, Monetary policy remains highly effective at zero interest rates. I have a new book coming out in a couple days, which I encourage you to read if you are interested in these issues.

  25. Gravatar of Michael Rulle Michael Rulle
    1. September 2021 at 14:08

    I still think Powell has been the most effective Fed Chair in my life. I fear he will either not run again or they will fire him and put some “hawk” or worse (MMT?) in there. I am glad that Yellen, despite her many weird statements earlier in the year (political of course, but she at least knows it) supported him last week.


    (Volcker crushing inflation may have been the greatest single action by a Fed Chair—it could have been luck—but one small recession and inflation disappeared—-inflation peaked one month after I joined Lehman in summer of ’79 at 13+% and Volcker was put in by Carter. I still remember senior partners forecasting 30% Fed funds rate. By’82 inflation was below 4% (that was when I first learned I was no dumber than anyone else).

  26. Gravatar of Sven Sven
    1. September 2021 at 14:34

    Professor Sumner, ok, I will read your book.

    But I have a monetary theory book as well, in exchange, would you read my book? I argue the opposite by saying that in the long run it is up to the government to keep aggregate demand in equilibrium with aggregate supply. And I explain why it happens this way in the book. I need someone who is knowledgeable (not an ordinary economist, someone who knows monetary theory) thus make a review and give a feedback to me. I would be really appreciated if you read it. It is a unique theory. The link of the book is below. I can provide a pdf version of the book as well upon receiving of the e-mail address.


    By the way, do not think I argue this way since I’m someone who is leftist or Marxist, I’m not. My argument is completely written with analytical economics reasoning based on the observation of real world.

  27. Gravatar of Michael Rulle Michael Rulle
    2. September 2021 at 05:13

    Now we have Judy Shelton. Jeez.

  28. Gravatar of postkey postkey
    2. September 2021 at 05:17

    “I have a new book coming out in a couple days, which I encourage you to read if you are interested in these issues.”

    Still ‘fighting’ yesterdays battles?

    Usually the ‘economists’ who use ‘macroeconomic models’ ‘believe’ that the solution to the current macroeconomic problem is the implementation of the ‘correct’ type of demand side policies. That is, how to increase income/output {‘growth’}.
    Increase M0, M2 or M3, cut r, or make it negative, implement ‘debt forgiveness’. Increase G and finance it by ‘borrowing’ from the central bank or by borrowing from the private sector. Or ensure that private credit is extended only for GDP transactions.
    All that is lacking is a ‘sufficient’ increase in effective demand!
    The neoclassical/Austrian economists, who believe that income/output is ‘supply determined’, will argue that all that is required to generate a large increase the growth of the underlying productive potential of an economy is for taxes to be cut and more ‘competition’, etc be introduced!

    Aside from the negative externalities of ‘growth’, what they ignore is the ‘energy supply side’?

    ‘We’ have 16 years?

    ‘Global peak oil production may have already happened in October of 2018 (https://energyskeptic.com/2020/will-covid-19-delay-peak-oil/ Table 1). It is likely the decline rate will be 6%, increasing exponentially by +0.015% a year (see post “Giant oil field decline rates and peak oil”). So, after 16 years remaining oil production will be just 10% of what it was at the peak.’

    ‘We’ have ten years?
    “ . . . our best estimate is that the net energy
    33:33 per barrel available for the global
    33:36 economy was about eight percent
    33:38 and that in over the next few years it
    33:42 will go down to zero percent
    33:44 uh best estimate at the moment is that
    33:46 actually the
    33:47 per average barrel of sweet crude
    33:51 uh we had the zero percent around 2022
    33:56 but there are ways and means of
    33:58 extending that so to be on the safe side
    34:00 here on our diagram
    34:02 we say that zero percent is definitely
    34:05 around 2030 . . .
    34:43 need net energy from oil and [if] it goes
    34:46 down to zero
    34:48 uh well we have collapsed not just
    34:50 collapse of the oil industry
    34:52 we have collapsed globally of the global
    34:54 industrial civilization this is what we
    34:56 are looking at at the moment . . . “

    Or, have 5 years? {unlikely?}.
    “The greatest threat to humanity on Earth is the escalating Arctic atmospheric methane buildup, caused by the destabilization of subsea methane hydrates. This subsea Arctic methane hydrate destabilization will go out of control in 2024 and lead to a catastrophic heatwave by 2026.”

  29. Gravatar of postkey postkey
    2. September 2021 at 10:03

    Taking a Cobb Douglass production function: Q = A.Ka.Lb.Ec {a, b c are superscripts}. Where ‘E’ is energy input.
    If ‘E’ is regarded as net energy input, then this will fall as ECoE’s increase?
    If there is less energy input, then this will reduce the marginal productivity of labour {and capital}. This will lead to a fall in the demand for labour, a shift to the left of the maximum potential of the economy, and an increase in voluntary unemployment.
    More dynamically, the growth of the potential income/output of an economy will be reduced?

  30. Gravatar of postkey postkey
    2. September 2021 at 10:11


    Here: https://eprints.soton.ac.uk/36569/1/KK_97_Disaggregated_Credit.pdf

    is a ‘monetarist'{albeit still ‘fighting yesterdays battles’} that uses inductive reasoning and econometric analysis to ‘prove his point’.

  31. Gravatar of ssumner ssumner
    2. September 2021 at 11:03

    Sven, Sorry, but it just doesn’t look like something I’d want to read (based on the Amazon description.)

  32. Gravatar of postkey postkey
    3. September 2021 at 00:11

    ‘Evidence’ that ‘renewables’ will not save ‘us’?

    “27.8 Final summary
    Current thinking is that global industrial businesses will replace a complex industrial ecosystem that took more than a century to build. The current system was built with the support of the highest calorifically dense source of energy the world has ever known (oil), in cheap abundant quantities, with easily available credit, and seemingly unlimited mineral resources. This replacement is hoped to be done at a time when there is comparatively very expensive energy, a fragile finance system saturated in debt, not enough minerals, and an unprecedented world population, embedded in a deteriorating natural environment. Most challenging of all, this has to be done within a few decades. It is the authors opinion that this will not go according to plan. This report has produced new numbers that are quite different to previous studies.”

  33. Gravatar of Jeff Jeff
    3. September 2021 at 07:27

    I don’t see where it’s been demonstrated that periodic contractions in economic output are even “bad”. Aren’t reductions in demand just a signaling mechanism? Why isn’t it incumbent on producers to make better products to merit the demand? What is so sacred about the “trend line” and what if the “trend” was established by producing a bunch of garbage? If the government tries to make up for all dips in demand, wouldn’t the quality of goods and services eventually just go to pot?

  34. Gravatar of ssumner ssumner
    3. September 2021 at 14:27

    Jeff, You said:

    “Aren’t reductions in demand just a signaling mechanism? Why isn’t it incumbent on producers to make better products to merit the demand?”

    For individual products, yes. For aggregate demand it merely signals central bank incompetence.

  35. Gravatar of Sven Sven
    4. September 2021 at 04:54

    Professor Sumner, I changed the description to its initial version. You are right when I reread it doesn’t seem good to me as well. But I changed the description a few times after publication. The thing is when you don’t have a name it is really hard to promote a book which I did not think about it during the writing process.

    The book has a new monetary theory which has explanations to contemporary issues. I think you are, as a prominent monetary policy expert, one of the people that would have highest level of interest to the book.


    P.S. At least reading the first chapter (monetary theory) would be ok for me.

  36. Gravatar of Vahid Vahid
    14. September 2021 at 11:45

    Can we start a new debate?

    How about the fact that cryptocurrency has been the most successful experiment in monetary policy in history? Nation-states (El Salvador) are adopting BTC, one of many technological innovations in financial technology.

    The destruction of remittance bloodsuckers is wonderful and with a medium that historically has outperformed every other asset for the last 10 years.

    This is an area to really study and talk about! Could it all burn to the ground? Absolutely, but let’s see how and why. Currently, it is working.

    I would love to see your take on this topic! If you need more information I am active in this space and can get you on some podcasts. idk – 🙂

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