From the comment section
Here’s a comment from Andy Harless:
The question of whether monetary policy was tight in late 2008 is largely a matter of definition. How does one define “tight” monetary policy? If you define it by comparing the nominal policy interest rate to the latest reported 12-month inflation rate, then it wasn’t tight. If you define it by comparing forecast NGDP to the historical trend, then it was very tight.
I have to admit, when I first heard (second or third hand and incomplete, some time in early 2009 IIRC) about what you were saying, I dismissed it as some crackpot idea. But when (a year or so later) I actually started to read your blog, I became convinced that your definition of monetary tightness is as reasonable as any other. In monetarist terms, NGDP is just a velocity-adjusted monetary aggregate, so it’s a variation on a traditional way of measuring the ease of monetary policy. In New Keynesian terms, it’s a special case of a forward-looking Taylor rule, and it’s the most obvious special case “” a lot more obvious than Taylor’s original rule “” so it deserves some presumption. In October 2008, if the Fed had been following a forward-looking, equal-coefficient Taylor rule, the governors would have been tearing out their hair trying to find ways to simulate negative interest rates rather than dragging their feet about cutting rates while obsessing about providing liquidity.
I had similar thoughts swirling around in my mind, but he expresses the idea very clearly and elegantly. He nails my approach to defining monetary policy, and my critique of policy in late 2008, all in one concise paragraph. People need to pressure Andy to get back to blogging.
Here’s Mark Sadowski (from the same thread):
There’s a lack of interest in most economics departments in economic history primarily because most students are concerned about the job market and economic history only prepares you for academia and there aren’t many openings in economic history because students aren’t interested in studying it (and around and around we go). Other graduate students openly sneered at me whenever I mentioned I was taking a course in economic history. It’s a vicious downward spiral and unfortunately I think a major reason why economists were blindsided by the Financial Crisis and the Great Recession is the lack of knowledge of economic history by some otherwise very bright people.
Exactly. Most economists have in the back of their mind the idea that Keynes showed monetary policy was ineffective at the zero bound during the Great Depression. How many of these economists know that by the end of 1933 (with near 25% unemployment) Keynes was complaining that FDR’s monetary policy was too inflationary. Or that when Roosevelt returned to the gold standard in January 1934, Keynes congratulated FDR for rejecting the advice of the “extreme inflationists.” Or how many know that most banks didn’t take reckless risks in the late 1920s, but were actually very conservatively managed. Or that the banking crisis happened because the nominal incomes of Americans fell in half. Queue up that old George Santayana quotation.
I haven’t commented on the ECB’s latest blunder, but Paul Krugman, Matt Yglesias, David Beckworth, Kantoos, etc, have already said what needs to be said.
A commenter sent me a link to a video that I made for the Warwick Economic Summit in England. (I wasn’t able to attend.) I can’t bear to watch myself on TV, so I have no idea how it turned out. I felt awkward standing in front of a black screen with no audience. There are supposed to be PowerPoint slides interspersed. I was limited to about 15 minutes, so the talk is sort of cut off at an awkward time.
Why do people hate watching themselves? A reminder that others don’t see our beautiful minds, but rather our not-so-beautiful bodies?
Tags: Taylor rule
6. March 2011 at 14:58
It’s a very good presentation Scott. A summary of your views is always useful, you’ve got a lot of good stuff on the blog that is now buried in there and hard to find. I know you’ve done some summary posts before — I wish you’d write a Tyler Cowen-style ebook summarizing your views on the crisis and on macro in general. You could make a few bucks in the process too.
6. March 2011 at 15:15
Allow me to be painfully explicit (this is an old high school teacher habit of mine):
“Those who do not learn from history are doomed to repeat it”
George Santayana
And he also wrote (as Lorenzo From Oz nudged me to recall):
“The wisest mind has something yet to learn.”
6. March 2011 at 15:29
Scott wrote:
“A reminder that others don’t see our beautiful minds, but rather our not-so-beautiful bodies?”
Lots of issues here. I think my mind is beautiful (and so, evidently, do most of my students and tutees), but my “heart” is full of self doubt (and let’s face it, the “heart” is really part of the mind). As for my body, I thought it was pretty impressive a decade ago (now, em, not so much). I’d really hate to see a videotape of one of my lectures.
6. March 2011 at 15:40
Andy, I’ve thought about a e-book, but graphs don’t show up very well on kindle.
Mark, I hadn’t heard that quote before.
6. March 2011 at 16:08
I agree with Andy- that was a good presentation. It’s not that often I finish watching a presentation saying “that makes a lot of sense”.
Also, I hate watching myself talk too…
6. March 2011 at 16:18
When talking about “tight” money could you specify which measure of money you are referring to? Take this chart for example (http://www.shadowstats.com/alternate_data/money-supply-charts).
Looking at the M1 line one can conclude that a dramatic increase in the money supply has no/little effect on the economy (at least in a zero bound crisis).
Looking at the M3 line one could conclude that a shrinking money supply is a significant part of the problem.
When you say that money is “too tight” you are referring to M3 (or similar broad measure of money) slowing to a negative growth rate?
6. March 2011 at 16:31
Scott wrote:
“Mark, I hadn’t heard that quote before.”
I believe that it’s buried somewhere in one of the volumes of his “Life of Reason.”
While I’m still searching, let me offer another one:
“Sanity is a madness put to good use.”
Again I can’t remember where, but, if necessary, I’ll find it. (I especially like that one.)
6. March 2011 at 19:04
OK, I quit. I can’t find the “wisest mind” quote. Anyone who remembers, please lend me a hand. The “sanity is a madness” quote comes from “Interpretations of Poetry and Religion”.
And as long as I’m here. I found another good one:
“When men and women agree, it is only in their conclusions; their reasons are always different.”
That’s from “Life of Reason”, the volume on “Reason in Society”.
6. March 2011 at 19:17
Oddly, I am okay with how I look on TV (well, mostly), but I feel the sound of my recorded voice would make a rhino wrinkle his nose. I consciously eliminate my “normal” voice to imitate those guys from the 1950s, who spoke with flat tones and phlegm on the radio.
I have to agree with the sentiments of Harless. Had you asked some time ago (before reading Sumners’ blog), “Is the Fed loose enough?”, I might have shrugged my shoulders.
Now I am a flaming anti-Nipponistsa!
That’s nice, in a way. Not only has the Internet perhaps leveled some playing fields, but old fogies can pick up new ideas, and learn to embrace them.
6. March 2011 at 20:33
Well, some folks in the European periphery are looking for inventive ways to increase the money supply despite the ECB.
http://www.bbc.co.uk/news/world-europe-12657225
Spain town reintroduces peseta to boost economy
A small town in northern Spain has decided to reintroduce the old Spanish currency – the peseta – alongside the euro to give the local economy a lift.
Shopkeepers in Mugardos want anyone with forgotten stashes of the old cash at home to come and spend it.
…
6. March 2011 at 21:19
David Beckworth posted the Sumner video on his blog, where I watched it. I would have preferred a minute or two of unabashed fear-mongering on that we can be the next Japan, but otherwise sure to be regarded as a classic in its field.
6. March 2011 at 23:10
Scott,
Can you explain a couple things:
First, Krugman makes this remark: “So what the ECB is saying, in effect, is that Europe should drive down nominal wages “” which can only be done by raising the unemployment rate “” in order to offset the effect of oil and food on headline inflation. (Real wages will fall in any case.)”
Only?
Second, the CB implements policy via a nominal rate. If oil prices rise at an increasing pace, then the inflation component of bond yields must rise too. If this is so, then the neutral equilibrium rate (in nominal terms) must rise too. So if monetary policy is to retain a consistent stance, it too must target a rising rate–this is true whether police is tight, loose, or neutral.
Condemning the ECB rate move seems premature in the sense that we don’t know their move won’t merely keep policy somewhat loose–in contrast to tightening enough to contain overall inflation or not tightening and allowing the price of oil to in effect loosen policy.
This feels like just another case of the difficulty of reasoning about the stance of policy via the interest-rate target. Indeed, they could even raise rates and end up with a policy loser than it is now (albeit tighter than it could have been with no change).
7. March 2011 at 02:41
please do address the ECB. the krugman/yglesias/beckworth pieces demonstrate that they don’t understand that institution.
7. March 2011 at 02:54
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7. March 2011 at 06:17
Peter, Thanks.
Russ. I define easy and tight in relation to the Fed’s target. Any policy stance expected to lead to undesirably fast AD growth is easy, and vice versa. My preference is to use NGDP as an indicator of AD. So in late 2008 monetary policy was expected to lead to NGDP growth (actually decline) that was less that the Fed hoped for. By that definition money was tight.
Mark, Those are good quotes, I should read him sometime.
(If I ever again have time to read anything.)
Thanks Benjamin.
Steve, Great idea, but alas, I’m afraid it won’t help.
Jon, I wouldn’t say nominal wages can only be driven down by unemployment, I’d say almost anytime the central bank drives down nominal wages with lower NGDP growth, you will get high unemployment.
You said;
“Second, the CB implements policy via a nominal rate. If oil prices rise at an increasing pace, then the inflation component of bond yields must rise too.”
This is a common misconception. It is NGDP growth not inflation that affects nominal wages. Oil shocks often tend to reduce NGDP growth. We’ve recently seen that bond yields have fallen on very worrisome news coming out of Libya. So I think monetary policy is becoming effectively tighter.
You said;
“Condemning the ECB rate move seems premature in the sense that we don’t know their move won’t merely keep policy somewhat loose-in contrast to tightening enough to contain overall inflation or not tightening and allowing the price of oil to in effect loosen policy.”
Actually, the nominal wage graph show pretty conclusively that ECB policy is currently tight. This will make it tighter.
You said;
“This feels like just another case of the difficulty of reasoning about the stance of policy via the interest-rate target. Indeed, they could even raise rates and end up with a policy loser than it is now (albeit tighter than it could have been with no change).”
No, reasoning from a price change would be to observe short term interest rates change in the free market, and then infer this tells us something about the economy. We know that this rate increase (if it occurs) will be produced by a tighter money policy. That makes it easier to predict the effects. BTW, I’m not saying that the change will necessarily have a huge impact on the economy, I have no crystal ball, but I’d guess any impact will be modest. Still, it’s a move in the wrong direction.
nyd, What don’t they understand about the ECB? (I’m probably equally ignorant.) Does the ECB target headline inflation or core inflation?
7. March 2011 at 06:57
Scott,
The ECB targets headline inflation and thus is ignoring the fact that core inflation is low and inflation expectations are stable (according to the ECB itself!). I had a commentator ask why I brought up core inflation when the ECB does not target it. My answer is that if a central bank wants to do inflation targeting it should at least try to do it right. Looking to headline inflation when core inflation is low and inflation expectations are stable is bound to be destabilizing.
BTW, did you see Kantoos’s post on this move? It is a good one: http://kantoos.wordpress.com/2011/03/04/is-trichet-out-of-his-mind/
7. March 2011 at 07:41
David
Like it was for the US in early 2008 when Bernanke was all worried about oil and commodities and the risk that they would “pass through”.
8. March 2011 at 08:54
David, The ECB is beyond stupid. And yes I did see the Kantoos piece, indeed I linked to it above.
8. March 2011 at 09:35
Re: “The wisest mind has something yet to learn.”
I’ll see your (alleged) Santayana and raise you Metrodorus of Chios: “None of us knows anything, not even this: whether we know or we do not know; nor do we know what ‘to not know’ or ‘to know’ are, nor on the whole whether anything is or is not.”
8. March 2011 at 15:09
Professor, I admire your independent mind and courage, attributes that Milton Friedman had and which drew me into economics. Your Warwick presentation was well done. The link seems broken now, so I was unable to double-check this, but I believe that the timing you mentioned for the monthly GDP and real rate series is off. GDP had slipped heading into Lehman’s failure but not much. The real (TIPS) rates rose from March into September 2008 but remained well below 2007’s levels until Lehman failed, when they doubled. I wanted to call this to your attention because I respect your core position, but this difference in timing perceptions is material and could cause confusion. On another matter, I suspect that the Fed had a de facto 4-6% target for Nominal GDP in 1998-2007. They raised rates whenever Nominal GDP’s expansion rose and threatened to stay above 6%. On still another matter, mark-to-market played a critical role in destroying capital after it was imposed in November 2007. That seems to have clearly and progressively reinforced uncertainties, helping to turn a moderate slowdown into a crisis. FASB 157’s imposition a tragic mistake which the Fed, the SEC and others are still reluctant to acknowledge. Thanks for your work.
8. March 2011 at 17:07
Bababooey,
My (alleged) quote is (as I interpret it) an exhortation towards humility. Your’s, on the other hand, veers on the nihilistic. 🙂
9. March 2011 at 16:03
@Scott
“David, The ECB is beyond stupid. And yes I did see the Kantoos piece, indeed I linked to it above.”
s/The ECB/Central planners/
There, made it more general.
16. March 2011 at 10:54
Bababooey, You said;
“I’ll see your (alleged) Santayana and raise you Metrodorus of Chios: “None of us knows anything, not even this: whether we know or we do not know; nor do we know what ‘to not know’ or ‘to know’ are, nor on the whole whether anything is or is not.””
That pretty much summarizes my view of Japan.
Clare, A few comments:
1. I’m not quite sure what you are claiming about GDP. Are you claiming the numbers I provided from Macroeconomics Advisors were inaccurate? RGDP fell 4% in Q3, almost all of which was before Lehman failed.
2. I agree on the real interest rates, but that is exactly what my graph showed. So I don’t think that was misleading. Maybe I misspoke–I intended to say real rates rose sharply between July and December 2008. Perhaps I said July and September by mistake. There is also the separate issue of whether tight money caused Lehman. And I would agree that the evidence is less clear in that area. Most indicators showed money tightening between July and September, but much less dramatically than between September and December. If I created the opposite impression that was my error. But I think my data is accurate.
You may well be right about mark to market. I haven’t commented because that’s not my area of expertise.
11. June 2011 at 13:52
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