How did we end up here?

I’ve finally had a chance to read Paul Romer’s critique of macroeconomics, and it’s every bit as interesting as you might expect.  I’m going to focus on a single issue, which in my view lies at the heart of what’s gone wrong in recent decades—identification.  This issue has been the main focus of my blogging over the past 7 1/2 years, so it’s very dear to my heart. By late 2008, it was clear to me that not only did economists not know how to identify monetary shocks, but also that they were very far off course, and didn’t even understand that fact. Indeed this misunderstanding actually became highly destructive to progress in both economic science and economic policymaking.  One of the two the worst contractionary monetary shocks of my lifetime is generally regarded as “easy money”.  So how did we get here?

1. The earliest monetary shocks were seen as involving the price of money.  Coin debasement was a common example.  No one knew the money supply, and banks did not yet exist. This policy tool was used by FDR in 1933, but today has fallen out of fashion in big economies. Small countries like Singapore still use the price of money (exchange rates) as a policy instrument, but they do not drive the research agenda.  I’m trying to bring it back with NGDP futures targeting.

2.  Although the monetarist approach to identification (i.e. the money supply) dates back at least to Hume, it really came into its own with fiat money, especially during hyperinflationary fiat regimes.  Milton Friedman preferred the M2 money supply as a monetary indicator, at least during part of his career.

3.  Then for some strange reason the profession shifted from the money supply to interest rates, as an indicator of monetary shocks.  But why?

Perhaps you are thinking that you know the answer.  Maybe it had something to do with the early 1980s, when velocity was unstable and monetarism was “discredited”.  If that is indeed what you are thinking, then it merely illustrates that you are even more confused than you know.  Yes, velocity is unstable.  And yes, that means Friedman’s 4% money growth rule might not be a good idea.  But that has absolutely no bearing on the argument for replacing the money supply with interest rates, as an indicator of the stance of monetary policy.

The relationship between i and NGDP is just as unstable as the relationship between M2 and NGDP, probably more unstable.  At least with M2, we generally can assume that an increase means an easier monetary policy, and a reduction means a tighter policy.  We don’t even know that much about the relationship between interest rates and NGDP. Right now, markets expect about a 1% fed funds rate in 2019. Suppose you had a crystal ball that told you that the fed funds rate in 2019 would be 3%, not 1%.  There’s a classic “monetary shock”. The stance of monetary policy changed unexpectedly.  But which way—is that easier than expected policy, or tighter?  I have no idea, and you don’t know either.  Even worse, my best guess would be “easier” but the official model says “tighter.”

Paul Romer says we know that monetary shocks are really important.  I agree.  And he says the Volcker disinflation proves that.  I agree, and could cite many other examples, probably even more than Romer could cite.  So I’m completely on board with his general critique of those who claim we don’t know whether monetary shocks are important.  But Romer then claims that the real interest rate is a useful measure of the stance of monetary policy, and it isn’t—not even close.

Am I denying that if the Fed suddenly raised the real interest rate by 200 basis points, money would be tighter on that particular day or week?  No, I agree that that statement is true.  But it’s also true that if the Fed suddenly raised the nominal interest rate by 200 basis points, money would be tighter on that particular day or week.  Or if the Fed suddenly cut M2 by 10%, money would be tighter on that particular day or week.

So why don’t we use M2 to measure the stance of monetary policy?  Because over longer periods of time, movements in M2 do not reliably signal easier or tighter monetary policy.  But that’s also true of movements in nominal interest rates. If you have a highly contractionary policy, then inflation and nominal rates will fall in the long run.  Hence low rates don’t mean easy money.  And this argument also applies to real interest rates.  If the Fed adopts a tight money policy that drives the economy into a depression, then real interest rates will decline, even as policy is effectively contractionary.  This actually happened in 1929-33 and 2008-09.

All of the traditional indicators are unreliable.  The smarter New Keynesians will say that money is tight when the interest rate is above its Wicksellian equilibrium rate. But how do we know when that is the case?  After all, the Wicksellian equilibrium rate cannot be directly observed.  You need to look at outcomes; Wicksell said interest rates were above equilibrium when prices were falling, and vice versa. But that means we can only identify easy and tight money by looking at outcomes; are prices rising or falling?

Today we would substitute above or below 2% inflation, or 4% NGDP growth, but the basic idea is the same.  Money is tight when it’s too tight to hit your target, and vice versa. Ben Bernanke got this right in 2003, and then lost track of this concept when he joined the Fed:

Do contemporary monetary policymakers provide the nominal stability recommended by Friedman? The answer to this question is not entirely straightforward. As I discussed earlier, for reasons of financial innovation and institutional change, the rate of money growth does not seem to be an adequate measure of the stance of monetary policy, and hence a stable monetary background for the economy cannot necessarily be identified with stable money growth. Nor are there other instruments of monetary policy whose behavior can be used unambiguously to judge this issue, as I have already noted. In particular, the fact that the Federal Reserve and other central banks actively manipulate their instrument interest rates is not necessarily inconsistent with their providing a stable monetary background, as that manipulation might be necessary to offset shocks that would otherwise endanger nominal stability.

Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman’s advice to heart.

Others will object that New Keynesians understand that it’s the level of interest rates relative to the Wicksellian equilibrium rate that matters.  For instance, a recent paper by Vasco Curdia shows that money was actually quite contractionary, during and after the Great Recession.

screen-shot-2016-09-19-at-4-42-20-pm

Yes, but that paper was written in 2015.  Back in late 2008 and throughout 2009, market monetarists were just about the only people claiming that monetary policy was highly contractionary—and that was the period when we most needed clear thinking.  Others were lulled by meaningless indicators like low nominal and real interest rates, as well as a ballooning monetary base.

How did we end up using interest rates as an indicator of the stance of monetary policy?  Romer provides one possible clue in his paper:

By rejecting any reliance on central authority, the members of a research field can coordinate their independent efforts only by maintaining an unwavering commitment to the pursuit of truth, established imperfectly, via the rough consensus that emerges from many independent assessments of publicly disclosed facts and logic; assessments that are made by people who honor clearly stated disagreement, who accept their own fallibility, and relish the chance to subvert any claim of authority, not to mention any claim of infallibility.

I fear that economists have deferred too much to the “central authority” of central banks.  When I talk to macroeconomists, they seem to think it’s natural to use interest rates in their monetary models because the central banks actually target short-term interest rates.  But that’s a lousy reason.

Another problem may be that some economists are infected by a popular prejudice—that low interest rates are a “good thing” for the economy.  We visualize that we would be more likely to buy a new house if interest rates fell, and extrapolate from that to the claim that low rates would boost GDP.  That’s obviously an example of the fallacy of composition.  Yes, I’d be more inclined to borrow money if interest rates fell, ceteris paribus.  But some other guy is less inclined to lend me the money if interest rates fell, ceteris paribus.  Of course ceteris is not paribus if interest rates fall, and it all depends on whether they fall because of an increase in the money supply (expansionary) or more bearish expectations from the public (contractionary.)

Elsewhere I call this “reasoning from a price change”, and even Nobel laureates do it:

Real interest rates have turned negative in many countries, as inflation remains quiescent and economies overseas struggle.

Yet, these negative rates haven’t done much to inspire investment, and Nobel laureate economist Robert Shiller is perplexed as to why.

“If I can borrow at a negative interest rate, I ought to be able to do something with that,” he tells U.K. magazine MoneyWeek. “The government should be borrowing, it would seem, heavily and investing in anything that yields a positive return.”

But, “that isn’t happening anywhere,” Shiller notes. “No country has that. . . . Even the corporate sector, you might think, would be investing at a very high pitch. They’re not, so something is amiss.”

And what is that?

“I don’t have a complete story of why it is. It’s a puzzle of our time,” he maintains.

Actually there is no puzzle.  Shiller seems unaware that it’s normal for the economy to be weak during periods of low interest rates, and strong during periods of high interest rates.  He seems to assume the opposite.  In fact, interest rates are usually low precisely during those periods when the investment schedule has shifted to the left.  Shiller’s mistake would be like someone being puzzled that oil consumption was low during 2009 “despite” low oil prices.

I know what commenters will say—I’m a pigmy throwing stones at Great Men. They are right.  Guilty as charged.  Look, I’ve made the mistake of reasoning from a price change numerous times—it’s easy to do.  But that won’t stop me from criticizing the ideas of people much more famous than I am.  In Paul Romer I’ve found a kindred spirit.

PS.  Since I’m nearly 6’4″, perhaps I should be PC and add, “Not that there’s anything wrong with being a pigmy”.

PPS.  This link has videos to the recent Mercatus/Cato conference on monetary policy rules.


Tags:

 
 
 

32 Responses to “How did we end up here?”

  1. Gravatar of Gary AndersonAnderson Gary AndersonAnderson
    19. September 2016 at 15:12

    Jamie Dimon agrees with you Scott. He said if rates were raised, his bank would make more money, meaning it would engage in more trading and lending.

  2. Gravatar of B Cole B Cole
    19. September 2016 at 15:17

    Pygmy it is.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. September 2016 at 16:15

    Obviously, I agree with this post…strongly. Romer however, makes the elementary mistake of thinking interest rates are the price of money too. He’s in good company. Walter Heller through Peter Conti Brown–I just read him saying it in his book on Fed Independence.

    The greatest macroeconomist of the 20th century was famous for insisting that interest rates were not the price of money, and therefore should not be the lodestar for monetary policy. Talk about the clue being hidden in plain sight!

  4. Gravatar of Ray Lopez Ray Lopez
    20. September 2016 at 00:36

    Several problems with our resident physical giant but intellectual pygmy. First, Sumner assumes a priori that money is not neutral short-term. What if it is? The FAVAR 2002 econometrics Bernanke paper says Fed policy shocks from 1959-2001 have a mere 3.2% to 13.2% (out of 100%) change on a variety of metrics, such as GDP, unemployment, etc. In other words, money is largely neutral. It’s statistically significant (as Bernanke said) but can we all agree that when a change in GDP is only 3.2% to 13.2% due to an unexpected change in Fed interest rates, and the rest of the 96.8% to 86.8% change is due to non-Fed factors, then the change due to interest rates is largely trivial? Now Sumner might counter that the Fed ‘should have done more’ in 1959-2001, but in fact he’s conceded in another post that the Fed had it right in that period. Sumner might then claim that the FAVAR paper only covers up to 2001, and the ‘real problems’ began in 2007, so the FAVAR paper is inapt. Perhaps, but this is an untestable hypothesis, therefore it’s metaphysics.

    Second–do you really want me to lecture on a second reason? OK I will–Sumner wants to replace either targeting Mi (i=1,2,3) or interest rates with another monetary framework, namely targeting NGDP. But the history of monetarism (a failed 18th century construct known as the Quantity Theory of Money, based on a defunct idea by a dead economist named Hume, inter alia, Hume also being an atheist which ipso facto means he’s rotting in hell right now, and a profoundly pessimistic dude (Google “Hume’s Skepticism” and recall Hume thought at any moment the sun might not rise from the east–I kid you not–and ‘anything can happen’)) is littered with failed metrics. Weeks (sp? 96 yr old economist a few years ago, now probably dead) from U of Chicago among others called for ‘price level targeting’ by the Fed in the 1930s. Sumner’s NGDPLT was formulated before, most recently by a 1970s economist. And the godfather of monetarism, Friedman, himself mocked the numerous proposals for monetary rules, saying that monetarists can never agree on what rule to apply. The Taylor rule is another ‘rule’ that works for a while then doesn’t. Solution? Realize you are being fooled by randomness, that the economy is nonlinear, that money is endogenously created (when the economy heats up, banks lend more, the cart follows the horse, the economy, not the other way around) and in any event money short-term is neutral. It has no real effect, and based on recently history increasing base money has no nominal effect either. When and if, as Rogoff et al wrote, this financial crisis passes, and typically it takes 20 years (2001 + 20 = 2021, or, 2007 + 20 = 2027, take your pick), then animal spirits (Keynes! he had it right on this topic) will pick up again and money lending will begin anew.

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2016 at 05:02

    Brad DeLong links to William White’s comedy act;

    http://www.bradford-delong.com/2016/09/must-read-the-problem-is-that-ultra-easy-money-that-creates-financial-imbalances-is-supposed-to-create-real-side-imbalan.html#more

    DeLong points out the obvious;

    ————quote———–
    The problem is that ultra-easy money that creates financial imbalances is supposed to create real-side imbalances as well. That is, in fact, how you know that there are financial imbalances: financial assets are supposedly “backed” by real-side assets that simply aren’t there. The financial imbalance of too much CDS in 2005 was matched by real houses that had been built that were occupied by “owners” who had no chance of paying their mortgages, and could only come out whole if the cycle continued another round at yet a higher level of prices. The financial imbalance of too much dollar-denominated Latin American debt in 1982 was matched by a real export sector in Latin American that simply could not export to earn enough hard currency to make up the debt amortization. In both cases, lenders made soporific by easy money did not do their due diligence as to what their debtors were doing (or, rather, not doing) to build (or, rather, not build) real assets of the value to back their financial debts.

    And the result of ultra-easy money is inflation, in assets or in real currently-produced commodities, as financial and spending values outrun real production values, and accelerating inflation until the crash comes.

    But where is the inflation? It’s not in any currently-produced goods and services. It’s not in any risky financial assets where buyers are ignoring disaster scenarios. Rather, the assets that are high priced are the Treasuries, which are valuable precisely because investors are conspicuously not underpricing risk and not ignoring disaster scenarios:
    —————–endquote—————–

    When he is good, he is very, very good, but when he is Brad….

  6. Gravatar of Majromax Majromax
    20. September 2016 at 06:07

    > But Romer then claims that the real interest rate is a useful measure of the stance of monetary policy, and it isn’t—not even close.

    I disagree here. As you show with your included graph, real interest rates are a great measure of the stance of monetary policy. The problem comes in that real rates are less stable than many assumed prior to 2008, so the measure is only viable looking backward.

    One rhetorical challenge of NGDP targeting is to show that NGDP is a more viable current measure of the economy than real-rate estimates. With the financial information available at the end of 2007 (and not future hypotheticals like an NGDP futures market), what would have unambiguously shown too-tight monetary conditions?

  7. Gravatar of Scott Sumner Scott Sumner
    20. September 2016 at 07:59

    Ray, You said after a previous post:

    “AS curve indeed slopes upwards, but more demand can result from the AD curve shifting to the right. By contrast, but using analogous principles, IS/LM is a model of money demand and supply, but the key is to understand that there’s no link between IS/LM and AS/AD curves except that the latter leads the former.”

    This is hilarious. Mr “Money is Neutral” now says the AS curve slopes upwards, which is only true if money is not neutral.

    And how does AS/AD “lead” IS/LM?

    Majromax, You said:

    “I disagree here. As you show with your included graph, real interest rates are a great measure of the stance of monetary policy.”

    I think you are confused, the graph does not show interest rates, real or nominal. It shows the nuetral rate.

  8. Gravatar of Tom Brown Tom Brown
    20. September 2016 at 09:33

    Scott, you write:

    I think you are confused, the graph does not show interest rates, real or nominal. It shows the nuetral rate.

    Now I’m confused. The “nuetral” (sp?) or the “natural” rate?

  9. Gravatar of Ryan Murphy Ryan Murphy
    20. September 2016 at 09:38

    I am not sure if Romer deserves the attention accorded to him on these issues. His philosophy of science is very superficial, and the roots of his complaints seem to mostly be that he is unable to conclusively triumph over his intellectual opponents. Plus, he writes in such a way that everyone can read their pet issues with macro (like “never reason from a price change”!) into what he is saying, when all he wants to really say is that Robert Lucas is a corrupt ideologue.

  10. Gravatar of Randomize Randomize
    20. September 2016 at 10:06

    This particular section is worth screaming from the rooftops over and over until people get it:

    “We visualize that we would be more likely to buy a new house if interest rates fell, and extrapolate from that to the claim that low rates would boost GDP. That’s obviously an example of the fallacy of composition. Yes, I’d be more inclined to borrow money if interest rates fell, ceteris paribus. But some other guy is less inclined to lend me the money if interest rates fell, ceteris paribus. Of course ceteris is not paribus if interest rates fall, and it all depends on whether they fall because of an increase in the money supply (expansionary) or more bearish expectations from the public (contractionary.)”

  11. Gravatar of Sean Sean
    20. September 2016 at 10:11

    Gary AndersonAnderson
    19. September 2016 at 15:12

    Jamie Dimon agrees with you Scott. He said if rates were raised, his bank would make more money, meaning it would engage in more trading and lending.

    Can someone explain to me why banks care about short term interest rates? They borrow and lend. They make money on spreads not absolute levels.

  12. Gravatar of Gary Anderson Gary Anderson
    20. September 2016 at 10:51

    @Sean YOu are right. But, they fear lending into the real economy, with long term loans, at historically low rates for too long. The spread you speak of is too narrow at lower or at negative rates. The spread is wider when rates are increased. Here is an article commenting on that very thing: http://americasmarkets.usatoday.com/2014/12/16/jamie-dimon-will-benefit-from-rising-rates/

    Also, Dimon said it himself. However, he also has massive derivatives on his books, buttressed by a massive amount of treasury bonds as collateral. Ellen Brown is wrong in one sense, saying that the swaps themselves keep interest rates low. The swaps bet on low interest rates, however, the demand for collateral keeps interest rates low.

    Jamie Dimon knows this as well. Getting a bigger spread is a fantasy of his, but he knows the collateral cannot be touched, or at least yields cannot rise by much or more collateral would be needed to be supplied.

    Maybe he doesn’t care if the counterparties are stretched, with a need to supply more collateral. Maybe he thinks they are capable to do it, so that he can have his cake, derivatives and eat it too, with higher spreads on loans.

  13. Gravatar of Scott Sumner Scott Sumner
    20. September 2016 at 11:44

    Tom, The neutral and the natural rate are two terms for the same concept.

    Ryan, I’m a huge fan of Lucas, and still found great value in Romer’s paper.

    What specifically is wrong with his complaints about how macroeconomists go about solving the identification problem?

    Thanks Randomize.

    Sean, You really don’t want to respond to Gary, it just encourages him.

  14. Gravatar of sean sean
    20. September 2016 at 12:30

    I think part of the reason why spreads are higher at higher levels of interest is a function of their being strong demand for loans leading to higher credit spreads and the other things mentioned (Which I don’t quite understand).

    Dimon isn’t going to see larger credit spreads if the fed forces rate hikes. Those will expand when demand increases for loans because the economy is strong.

  15. Gravatar of Gary Anderson Gary Anderson
    20. September 2016 at 13:29

    Then he won’t learn anything, Scott. You know that Dimon wants both low rates and high rates. He wants counterparties that don’t go bust and he wants to make a bigger spread on loans. But I forgot, you claim not to know anything about banks, so.

  16. Gravatar of Gary Anderson Gary Anderson
    20. September 2016 at 13:35

    Yes Sean, I can only take Dimon’s word for it that he wants higher rates to make more money but does not want a shock leading to rapidly higher rates. This is why Will Rogers said bankers don’t know much about their business. They walk a tightrope, and thus they have no certainty.

    If you listen to Scott, you will think that the new normal does not exist. You will think that rates will rise in the future as economic activity picks up, all the while demand for bonds increases in good and bad times.

    That rise in rates would only happen if supply spiked dramatically, and I am not sure that is going to happen. Most supply is being gobbled up quickly, with subscriptions to auctions being multiples of one. And in the Great Recession, bond supply increased dramatically and yields went down. You can’t have enough bonds if you are a counterparty.

    Scott does not understand that. I don’t know why.

  17. Gravatar of Gary Anderson Gary Anderson
    20. September 2016 at 13:39

    And the only reason Scott wants assets to go up is to keep the banks afloat. I didn’t learn that lesson from him and he has not forgiven me for it.

    It is a medicine that may be needed, and heals the patient but kills his family, the real economy. Rising asset values like oil and easy money housing, are hard to control, which is why there has to be a better way.

  18. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. September 2016 at 17:02

    I don’t believe that any economic paper has made me laugh so much as Romer’s: thanks so much for the link. (I mean that in a good way.)

    Very nice combination of rhetoric and dialectic …

  19. Gravatar of Chuck Biscuits Chuck Biscuits
    20. September 2016 at 19:24

    I see Sumner is no longer even pretending to not rely on the natural/neutral rate in his policy prescriptions.

  20. Gravatar of HL HL
    20. September 2016 at 21:25

    Hi, Scott. BOJ just promised to overshoot its price stability target in the future if necessary.

    “…adopt a commitment that allows inflation to overshoot the price stability target so as to strengthen the forward looking mechanism in the formation of inflation expectations.”

  21. Gravatar of Gary Anderson Gary Anderson
    20. September 2016 at 21:42

    The BOJ is still lame, saying it will buy long bonds as assets. Yet that pushed yields up and the price down, which makes absolutely no sense if it means fewer bonds. That would imply supply is lessened and yields should go down.

    I would ask what I am missing but I don’t want you all to get into trouble for talking to me.

  22. Gravatar of Ray Lopez Ray Lopez
    20. September 2016 at 23:04

    @Sumner – professor, I believe you are quite mistaken (and not for the first time): AD-AS curve is agnostic as to whether the underlying model is classical, neo-classical, Keynesian, or monetarist. By contrast, IS/LM describes how money works in an economy, but it does not necessarily imply monetarism works to drive the economy (though that is how most textbooks describing IS/LM state the model). It’s just as easy to visualize that money is endogenous (it lags the real economy, described by the AD-AS model). Wikipedia is helpful: https://en.wikipedia.org/wiki/AD%E2%80%93AS_model And if it makes you feel better, just remember “Ray thinks AS curve is very very vertical, but not 100% vertical” (maybe that will sink into your thick 6’4″ frame).

    @Patrick R. Sullivan – I did not think the Brad DeLong blurb you quoted was at all controversial. DeLong thinks the economy is not run by ‘money’ but by something real (represented by money) and if that ‘something real’ is fake, like the fake, unaffordable housing of 2007, then disaster results. His only controversial statement (a bit) is that US govt paper is ‘risk-free’ which I don’t believe is completely true, but that’s perhaps semantics. It’s 99.9% safe most of the time.

  23. Gravatar of Chuck Biscuits Chuck Biscuits
    21. September 2016 at 03:53

    @HL

    Promises, promises, promises. How, EXACTLY, is the BOJ (or Fed or ECB for that matter) going to do this?

  24. Gravatar of Gary Anderson Gary Anderson
    21. September 2016 at 04:14

    The 10 year Japanese bond dropped back into negative territory. The BOJ owns 33 percent of the bonds already and 60 percent of the ETF’s. Perhaps Scott wants the BOJ to own all of Japan, lol.

    The BOJ should buy other assets than the bonds, as it makes them more scarce, which is why, after the announcement it was not long before they went back into negative territory.

    All that is left is for the BOJ to buy foreign assets or do real helicopter money, which is illegal still: https://www.stratfor.com/analysis/japans-central-bank-needs-course-correction

  25. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. September 2016 at 04:30

    Double Barro[ed] (it’s Casey Mulligan’s Redistribution Recession redux);

    http://www.wsj.com/articles/the-reasons-behind-the-obama-non-recovery-1474412963

    —————-quote—————-
    Arguing that the recovery has been weak because the downturn was severe or coincided with a major financial crisis conflicts with the evidence, which shows that a larger decline predicts a stronger recovery. Moreover, many of the biggest downturns featured financial crises. For example, the U.S. per capita GDP growth rate from 1933-40 was 6.5% per year, the highest of any peacetime interval of several years, despite the 1937 recession. This strong recovery followed the cumulative decline in the level of per capita GDP by around 29% from 1929-33 during the Great Depression.

    ….

    The main U.S. policy used to counter the Great Recession was increased government transfer payments. Federal social benefits to persons as a ratio to GDP went from 8.7% in 2007 to 11.7% in 2010, then fell to 10.9% in 2015. The main increases applied to Medicaid, Medicare, Social Security (including disability) and food stamps, whereas unemployment insurance first rose then fell. Unfortunately, increased transfer payments do not promote productivity growth.
    —————-endquote——————-

  26. Gravatar of bill bill
    21. September 2016 at 04:38

    The chart on the “Estimated Natural Rate of Interest (annual rate)” is deceptive in that the Fed itself has a very direct impact on where the neutral rate goes (I prefer the term neutral because the word natural makes it seem like the rate is out of our control). The Fed that I’ve been observing may “want” a 2% neutral rate in some intellectual sense, but their behavior to date absolutely will not get us there. Someone should tell them that the 10 year Treasury is at 1.7%. This Fed wouldn’t know what to do with NGDP futures – they don’t even know what to do with interest rate futures.

  27. Gravatar of Ray Lopez Ray Lopez
    21. September 2016 at 06:00

    Another criticism of this post by Sumner is within its own terms: forget money neutrality or non-neutrality. Just look at the chart, the natural rate of interest is in fact, this year, close to zero. So right now the Fed, by Sumner’s own logic, “has it right” since we have zero rates. Sure, they may have made a mistake from 2007 to 2016, but right now, all’s well? So what is Sumner’s complaint? Mr. Sumner, tear down this blog! Go home, your work is finished.

  28. Gravatar of Gary Anderson Gary Anderson
    21. September 2016 at 06:24

    Ray, I wrote an article in a similar vein, or is it vane. Or vain? Oh well, my attempt at humor. I wrote that the Fed has done all they want to do, and as long as there is a little pulse, the Fed is happy, no matter if main street suffers. But we know this is what the Fed does. It saves banks, not people.

    http://www.talkmarkets.com/content/global-markets/central-bank-victory-and-negative-bond-rates?post=100707&uid=4798

    Helicopter money could do both, save both people and banks. But the Fed fears it.

  29. Gravatar of Ray Lopez Ray Lopez
    21. September 2016 at 11:13

    @Gary Anderson, thanks, nice article. I think helicopter money (as was done in the US Civil War, literally, money was printed and handed to the US Treasury, which is illegal now but I’m sure they can amend the rules) would not be a ‘bad thing’ (nor, since I believe in money neutrality, a good thing). It’s like a placebo in medicine, why not try it? It can’t hurt. Yet strangely Sumner picks on you (so it seems) since somebody in U of Chicago, probably a cranky octogenarian when Sumner was a wee lad, said “inflation is bad” and he sticks to this mantra despite the experience of Brazil which shows 40 years of high teens inflation did not really hurt real growth (money is neutral after all). Hyperinflation (money changing hourly) is another story, even I agree it’s not neutral (btw, Sumner’s NGDPLT has the potential to cause hyperinflation IMO, since it has no discretion and is a ‘pedal to the metal’ framework). Sumner is a strange guy, it seems everybody in the world is wrong and/or doesn’t understand him.

  30. Gravatar of ssumner ssumner
    21. September 2016 at 13:23

    Ray, You said;

    “AD-AS curve is agnostic as to whether the underlying model is classical, neo-classical, Keynesian, or monetarist.”

    Good God! What will you come up with next?

    “So right now the Fed, by Sumner’s own logic, “has it right” since we have zero rates.”

    I guess that answers my question. I do think a zero to 1/4% rate is appropriate right now,

    Bill, Good point.

  31. Gravatar of Ray Lopez Ray Lopez
    22. September 2016 at 00:49

    @ssumner – Wikipedia that… https://en.wikipedia.org/wiki/AD-AS_model (“The conventional “aggregate supply and demand” model is, in actuality, a Keynesian visualization that has come to be a widely accepted image of the theory. The Classical supply and demand model, which is largely based on Say’s law—that supply creates its own demand—depicts the aggregate supply curve as being vertical at all times (not just in the long-run)” – as I said, the AD-AS model is agnostic.

  32. Gravatar of ssumner ssumner
    23. September 2016 at 07:08

    Ray, The model is agnostic, the upward sloping AS curve is an “opinion”

Leave a Reply