George Selgin has a new blog

George Selgin appraises QE and Fed policy more generally over the past decade. I think it’s fair to say that he’s not a big fan. The way he frames the discussion might lead some readers to think he sharply disagrees with my views, but this is more a stylistic difference in emphasis.  On the core issues we agree:

1.  The Fed policy during the Great Recession should not be viewed as a great success.  Yes, we did better than Europe, but the recovery was still quite disappointing in an absolute sense.

2.  A policy of stable NGDP growth would have been far superior to actual Fed policy.

3.  With a better policy (such as NGDP targeting), it’s quite possible that little or no QE would have been needed, and there would have been less Fed intervention into credit markets.

Keep those three points in mind if it seems like he’s less in favor of QE than I am. George also favors a somewhat lower NGDP target than I favor, which leads him to put more weight on policy errors that occurred before 2008.  I like the way he ends the post:

Am I suggesting that the Fed could not possibly have done worse? Of course not. Only someone with a severely defective imagination could suppose so.  Whatever his shortcomings, Ben Bernanke was far from being an incompetent central banker.  In suggesting that we might have done better than Bernanke’s Fed did, I don’t mean that we could have used a better discretion-wielding central banker. I mean that we might have been better off avoiding seat-of-the-pants-style central banking altogether.

I struggle, moreover, to understand why more people don’t take the same view.   For if it takes a stunted imagination to suppose that things couldn’t have been worse, it takes a no-less defective one to suppose that we couldn’t possibly improve upon the presently-constituted Fed. Far [from] supplying grounds for celebration, or warranting complacency, the events of the last decade or so ought to make it more evident than ever that our monetary system is very far from being the best of all possible alternatives.

George links to a paper by Yi Wen with the following abstract:

We use a general equilibrium finance model that features explicit government purchases of private debts to shed light on some of the principal working mechanisms of the Federal Reserve’s large-scale asset purchases (LSAP) and their macroeconomic effects. Our model predicts that unless private asset purchases are highly persistent and extremely large (on the order of more than 50% of annual GDP), money injections through LSAP cannot effectively boost aggregate output and employment even if inflation is fully anchored and the real interest rate significantly reduced. Our framework also sheds light on some longstanding financial puzzles and monetary policy questions facing central banks around the world, such as (i) the flight to liquidity under a credit crunch and debt crisis, (ii) the liquidity trap, and (iii) the low inflation puzzle under quantitative easing.

Someone needs to explain to me the phrase “even if inflation is fully anchored.” Obviously if inflation is fully anchored then it’s almost logically impossible for expansionary monetary policy to boost RGDP.  (Unless the SRAS was 100% flat, which it isn’t.)  So why would an empirical result of this sort be at all interesting?

Obviously I’m missing something.  But what?


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16 Responses to “George Selgin has a new blog”

  1. Gravatar of Benjamin Cole Benjamin Cole
    5. April 2015 at 18:22

    Ha! I blogged about that Yi Wen-St Louis Fed study way back for Historinhas, back in Oct. 2013, when the original was posted.

    If you read the Wen study, one can conclude that the Fed could pay down the entire national debt without much inflation, but with some positive stimulus.

    Wen is a senior economist at the St. Louis Fed, btw.

    At first, Wen’s study seems preposterous. I still wonder if he overstates matters.

    But then—where has QE led to inflation? In Japan? Europe? The USA? So far, what is the observed connection between QE and inflation? When the U.S.went to QE, gold prices cracked.

    Is it merely convention and theory that prevents more-aggressive use of QE?

    What about practical results?

    The Dallas Fed also presented a study that QE stabilizes prices, as people have more faith there are assets backing up paper currency. The Rentenmark and German hyperinflation are discussed. See: Inflation Is Not Always and Everywhere a Monetary Phenomenon by Antonella Tutino and Carlos E.J.M. Zarazaga June 2014.

    I will say this: Why be so squeamish about QE? What are the downsides?

    But I see huge upsides to QE—who does not like paying off national debt, and stimulating the economy, with little effect on inflation?

  2. Gravatar of Benjamin Cole Benjamin Cole
    5. April 2015 at 20:05

    And an earlier report from the NY Fed, The Macroeconomic Effects of Large-Scale Asset Purchase Programs (authored by a trio, Han Chen, Vasco Cúrdia, and Andrea Ferrero), says much the same, no inflation from QE.

  3. Gravatar of Michael Byrnes Michael Byrnes
    6. April 2015 at 02:55

    “Obviously I’m missing something. But what?”

    A link to Selgin’s blog under “Sites I visit”?

    On the topic of his post, I see very little difference between your views and his – I’ve never seen a post from you extolling the virtues of “seat-of-the-pants-style central banking”.

    I’m inclined to agree with George’s point (at least, what think is his point) that QE was about more than nominal income. As you have argued many times, the Fed could have done more (to raise nominal income) with less (QE).

  4. Gravatar of W. Peden W. Peden
    6. April 2015 at 04:15

    I think that the real difference of emphasis is on how NGDP targeting tends to obviate the need for QE. As you say, you both agree on this, but Selgin’s post really hammered the point home.

    I do like how Selgin manages to do the Austrian School-esque critique of central bankers style, while being symmetric in his condemnation of both expansionary and contractionary monetary policy. You do so as well, of course, but you’re a bit more polite I feel. Both have their place: your style is good for persuading those reluctant to be too critical of the Fed et al, while Selgin’s is a good way of emphasising the importance of sound money (properly understood) to those used to condemning the Fed.

  5. Gravatar of W. Peden W. Peden
    6. April 2015 at 04:16

    (I should add that I came to this blog thinking that inflation targeting had solved the problem of monetary policy, and your style convinced me otherwise, and IIRC introduced me to Selgin’s work and free banking in general.)

  6. Gravatar of ssumner ssumner
    6. April 2015 at 05:13

    Everyone, All good points. And I added his blog to my blogroll.

  7. Gravatar of flow5 flow5
    6. April 2015 at 07:24

    The idea that “pump priming” must act on R-gDp first (in order to jump start economic activity coming out of a recession), is erroneous. In effect, that actually cements Sumner’s claim that the Fed should target N-gDp (and rightly assume that the appellation, reflation, is also required).

  8. Gravatar of Anthony McNease Anthony McNease
    6. April 2015 at 08:34

    On the topic of policy I believe from the evidence I’ve read that the Fed, with few exceptions, has attempted to fulfill its dual mandate very literally. To do this I think it has acted very tactically when a more strategic perspective could have been more useful. Specifically, I do not think the Fed entertained Scott’s suggestion of “what’s the best policy regime?” question asking. I think the Fed went about its daily business of looking at inflation data and employment data and wondered what it could do tactically to better both of those measurements. Bernanke’s blog implicitly suggests this is so when he writes essentially “you can’t blame us for low rates….we’re just doing our jobs.”

    On the question of whether or not the current low growth economy is due to AD or AS I honestly don’t know. Regarding AD I have a hard time thinking that there is ever a lack of demand. People always want stuff. Even when households are deleveraging they still want to buy stuff. I think the case for Agg Supply though is complicated by the global fact of very low variable costs for most things. Mechanization, globalization of labor, extremely low shipping costs, efficient supply chains, bottoming energy costs, economic liberalization…… The upfront fixed costs are probably very steep, so maybe capacity is already running at max with too little investment in more factories, distribution centers, ships, trains…….etc. Capital deployment looks like it’s going towards existing operations. This results in too much capital chasing too few opportunities and hence very low returns. Maybe the AS drag is a lack of capital deployment to new ventures outside of software.

  9. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    6. April 2015 at 10:42

    All, when I started following MM blogs, one of my first questions was if NGDP (and LT in particular) would not trigger interventions that would be so large that would be impractical. Buying up 50% of GDP in a variety of assets is that kind of very large intervention. Prof Sumner answered by arguing that if the monetary authority had credibility long and variable LEADS would make the actual intervention much smaller. I believe in the power of expectations, so, it seems a reasonable hypothesis. I don’t think that the risk of large scale QE is when you are phasing it in, but when authorities are trying to phase it out. How big would a contractionary policy have to be if you ahd purchased 50% of GDP in assets ? If the US successfully “normalize” monetary policy in the coming quarters, that experience will be invaluable for the adoption of NGDP targeting moving forward …

  10. Gravatar of Anthony McNease Anthony McNease
    6. April 2015 at 11:42

    Jose,

    ” I don’t think that the risk of large scale QE is when you are phasing it in, but when authorities are trying to phase it out. How big would a contractionary policy have to be if you ahd purchased 50% of GDP in assets?”

    I think currently there is a deep expectation of very low inflation and nominal output. Therefore I believe a central bank would have greater credibility in shifting expectations towards tighter money as opposed to easy.

  11. Gravatar of ThomasH ThomasH
    6. April 2015 at 13:32

    2. A policy of stable NGDP growth would have been far superior to actual Fed policy.

    That “targeting” NGDP, moving whatever policy levers — short term interest rates, long term interest rates, interest rates on reserves, whatever, in response to deviations of NGDP from its target trend would have been better than actual Fed policy, seems plausible. But could we see a model in which this is derived? And in such a model could we compare NGDPL targeting to PL targeting?

  12. Gravatar of ThomasH ThomasH
    6. April 2015 at 13:39

    @ McNeese

    “has attempted to fulfill its dual mandate very literally.”

    It does not look to me as if the Fed has attempted to keep average inflation at 2%. It looks to me as if it has attempted to prevent inflation from exceeding 2%. If it was trying to get inflation above 2% for a period, it would have bought and more more long term assets until it got inflation above 2%.

  13. Gravatar of George Selgin George Selgin
    6. April 2015 at 13:43

    “That “targeting” NGDP, moving whatever policy levers “” short term interest rates, long term interest rates, interest rates on reserves, whatever, in response to deviations of NGDP from its target trend would have been better than actual Fed policy, seems plausible. But could we see a model in which this is derived? And in such a model could we compare NGDPL targeting to PL targeting?”

    With forward-looking targeting (“targeting the forecast), one advantage is that you never get a severe contraction, and so are less likely to hit the zero bound or to see large declines in either velocity or the money multiplier.

  14. Gravatar of ssumner ssumner
    6. April 2015 at 14:36

    Anthony, You said:

    “Regarding AD I have a hard time thinking that there is ever a lack of demand. People always want stuff.”

    Yes, people always want more stuff, but that’s not really what people mean by “AD.” Demand depends on the total nominal expenditure.

    Thomas, It’s not hard to come up with a model where NGDP looks good, the interesting questions are empirical. Which is what motivated my newest post.

  15. Gravatar of Anthony McNease Anthony McNease
    7. April 2015 at 05:43

    ThomasH:

    “It does not look to me as if the Fed has attempted to keep average inflation at 2%”

    Good point and agree. Someone, probably Scott, wrote here years ago that the 2% wasn’t a target but a ceiling.

    Scott:

    “Yes, people always want more stuff, but that’s not really what people mean by “AD.” Demand depends on the total nominal expenditure.”

    Yes, I was speaking a bit tongue in cheek. Sarcasm doesn’t translate well on the intertubes sometimes.

  16. Gravatar of ssumner ssumner
    7. April 2015 at 06:44

    Anthony, Sorry, I have so many different types of commenters (including Ray) that it’s sometimes hard to tell who’s joking.

    🙂

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