Interest rates are always and everywhere a horrible guide to the stance of monetary policy

Here’s Paul Krugman:

But in the world we’ve been living in this past quarter-century or more, inflation expectations haven’t moved much, and nominal interest rates have, in practice, been a pretty good guide to the stance of monetary policy.”

Throughout the post, Krugman seems to imply that nominal interest rates are a good guide to the stance of monetary policy as long as inflation expectations are fairly stable.  And also that inflation expectations have been fairly stable in recent decades.  This would seem to lead to the absurd conclusion that monetary policy must have been very expansionary in 2008 because nominal interest rates fell sharply!

Now let’s first get one thing out of the way.  Words mean what the public thinks they mean.  Most people agree with Krugman that low rates mean easy money, so in a sense that is what low rates mean.  There is no generally accepted definition of what we mean by the “stance” of monetary policy.  So I won’t try to argue that Krugman has made some sort of simple mistake here, but rather that nominal rates are just about the most useless definition of monetary policy one can imagine.  Here are some possible indicators of the stance of monetary policy:

1.  Nominal interest rates

2. Real interest rates

3.  The monetary base

4.  M2

5.  The trade-weighted exchange rate

6.  Commodity price indices.

7.  Gold prices

8.  The CPI

9.  TIPS spreads

10.  Expected NGDP growth.

Obviously I favor number 10, but let’s talk about one I don’t favor, the monetary base.  During the decade prior to the subprime crisis the base had been trending upward at about 5% per year.  Then between August 2007 and May 2008 the base leveled off.  This sharp slowdown in base growth was associated with:

1.  Slower NGDP growth

2.  Sharply falling nominal (and real) interest rates

The NGDP figures suggest that money was getting tighter, as the Fed was stopping the printing presses.  The interest rates were signaling (according to Krugman) that money was getting easier.  Which definition is the most useful in this case?  I think it’s pretty obvious.

Now let me be clear on one point.  THE MONETARY BASE IS ALSO A LOUSY INDICATOR OF THE STANCE OF MONETARY POLICY.  Over the past 5 years the monetary base has been just as bad as nominal interest rates.

I believe that if Paul Krugman gave this issue some thought he’d have to end up agreeing with me.  Some might argue that NGDP doesn’t measure the tightness of monetary policy, but rather the results.  They say we need to look at the input into monetary policy, and that’s nominal interest rates.  But why nominal interest rates?  Those are just one of many variables that the Fed influences in the short run.  Policy also influences gold prices, exchange rates, commodity prices, TIPS spreads, M2, etc., etc.  Indeed if we want the most direct policy tool of all, it would be the base.  The Fed uses changes in the base to target all the other variables, including the fed funds rate.

No, if we look for Krugman’s hidden assumptions here we need to ask why he thinks nominal rates are not as good an indicator as real rates.  Think about it; nominal rates are easier for the Fed to target than real rates.  And I think the answer is clear.  Whether Krugman realizes it or not he must be making some assumptions along the following lines.  “If we used nominal rates when inflation is unstable that would lead to the absurd conclusion that money was really tight during the German hyperinflation.”  If I’m right, then Krugman is using the macroeconomic outcome to infer something about the reliability of nominal rates as a monetary policy indicator.

So that’s probably why Krugman ends up with real rates being superior when inflation is unstable (and of course they are identical when inflation expectations are stable.)   But here’s the problem, inflation isn’t the only thing that distorts interest rates, real growth is also very important.  Thus a tight money policy can lead to expectations of recession, and this can depress even real interest rates.  This happened in the 1930s, and it’s happened again since 2008.  Both Krugman and I think real growth plus inflation is a better Fed target that inflation alone.  So it would be really useful to have a sense of whether our measure of “easy money” is consistent with what we think monetary policy should be doing to NGDP.  If a so-called easy money policy leads to much slower NGDP growth, then there is something very wrong with our monetary policy indicator, just as there would be if “tight money” led to hyperinflation.

Remember, there are at least 10 possible indicators; it’s not just NGDP and nominal rates.  Thus we need to be pragmatists and pick the most useful indicator.  You can’t just announce nominal rates are the right indicator among those 10, you must justify your choice.  Ben Bernanke was being very pragmatic back in 2003 when he rejected both money and interest rates, and suggested more useful indicators of the stance of monetary policy:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman  . . . nominal interest rates are not good indicators of the stance of policy . . .  The real short-term interest rate . . . is also imperfect . . .  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.


Ultimately it makes no sense to talk about easy and tight money, only money that is too easy or too tight to hit the policy objective.  I’m begging my colleagues to adopt a more sensible terminology so that we can stop speaking to each other using different languages.

PS. Starting next week I will cut back on blogging for some travel.

HT:  Marcus Nunes



52 Responses to “Interest rates are always and everywhere a horrible guide to the stance of monetary policy”

  1. Gravatar of Cullen Roche Cullen Roche
    18. August 2013 at 10:34

    Scott, I promise I’ll stop nagging you after this comment, but this post really piqued my interest. In your last post, you said:

    “Monetary policy is all about the Fed’s control of the supply and demand for base money.”

    In this post, you said:


    How to you rectify these two contradictory statements? Should we conclude that “monetary policy is all about the Fed’s control of NGDP”?



  2. Gravatar of marcus nunes marcus nunes
    18. August 2013 at 10:53

    Obsessions with interest rates and inflation result in disorientation:

  3. Gravatar of Bob Murphy Bob Murphy
    18. August 2013 at 11:04

    For whatever reason, this particular post struck me as the best one you’ve written on the subject, Scott. (Perhaps because you are attacking Krugman?)

    My only main complaint–which I’ve brought up to you before–is that you personally don’t obey your own rule. You routinely (by which I mean, I think I’ve seen you do it 3 times at least) explain to your readers how crazy the ECB was, by saying they raised interest rates at one point in the last few years (can’t remember when). And yet, for all we know, they were just trying to convince people that they expected really high NGDP growth…interest rate hikes are always a lousy indicator of monetary policy, right?

  4. Gravatar of Negation of Ideology Negation of Ideology
    18. August 2013 at 11:04

    Cullen – There’s a difference between tools and targets.

    “Monetary policy is all about the Fed’s control of the supply and demand for base money.”

    is completely consistent with


    simply because the second statement doesn’t include base money demand. If base money demand tripled and the the Fed only doubled base money supply, then that would be tight money, not loose money.

    Then the question becomes how do we define or measure base money demand? Well, Scott seems to believe that the most useful definition is the inverse of NDGP. I agree with that view, but you could use the inverse of M2, CPI, etc.

    The Fed directly controls base money supply, and also has ways of influencing base money demand, such as the required reserve ratio and interest or penalties on reserves. If the Fed tripled the reserve ratio and only doubled base money supply, would that be tight or loose money? What if it paid 8% on reserves and doubled base money? If you don’t have some standard for base money demand, those two questions are unanswerable.

  5. Gravatar of dtoh dtoh
    18. August 2013 at 11:05

    1. This really simple. Monetary policy is tight if you’re below your target. Money policy is loose if you’re over your target.

    2. I agree NGDP is probably the right target. I wonder however how MB – ER would work. I’d guess it tracks NGDP pretty closely but perhaps with some temporal lag.

  6. Gravatar of Cullen Roche Cullen Roche
    18. August 2013 at 11:42


    That makes perfect sense. Thanks. I still don’t see why we care so much about base money though. Which was really the point of my response to Dr. Krugman in the previous post which Scott was responding to which wasn’t a response to me even though the PK response was a response to me (whew!) So, why do I think we should we stop worrying about base money in this environment?

    Well, base money is made up of two primary components – deposits held on reserve at the Fed and physical cash. Reserves play no role in bank lending and really have only secondary impacts on overall output (I don’t have the time nor the space to get into why QE hasn’t done much if anything, but the short answer is it’s a simple swap of long duration assets for short duration assets that doesn’t change the net worth of the pvt sector). There’s an obvious interest rate channel, but Scott’s not interested in that. So that leaves us with physical cash and its impact on the economy. But physical cash is what I refer to as a facilitating form of money (just as reserves are, they facilitate interbank settlement and reserve requirements). That is, you need a bank account to access cash. The US Tsy doesn’t ship carts of cash out to banks and force depositors to withdraw cash via the ATM. That’s just not how it works. The Fed places orders with the US Tsy for new cash and Tsy supplies cash to banks when there is increased demand. There’s really no such thing as a cash “helicopter drop”.

    So what we’re really getting down to is whether or not we can increase the demand for base money (cash, here) via various policy tools. Can the Fed simply exert its will on the public and scare it into believing there will be inflation via the expectations channel? I guess that’s the big debate here and ultimately the crux of whether Market Monetarism has any teeth.

    Now, where Scott and I (maybe?) agree entirely is with regards to how the Fed could actually back up this expectations channel with actual expansion of its balance sheet. For instance, if the Fed set a NGDP target of 5% and made a credible promise to buy bags of dirt for $10 from anyone who came to the Fed with a bag of dirt then there’s little doubt in my mind that this would boost aggregate demand. But this is not monetary policy and its totally different than the asset swaps they’re performing today. This is the Fed acting as a fiscal entity usurping the power of the purse that is the domain of the US Congress. In other words, if Sumner advocates this sort of a policy then he’s really a fiscalist who prefers fiscal policy through the Fed.

    Now, someone please tell me where I’ve gone wrong because I am sure everyone on this website thinks I am smoking something extraordinarily strong. 🙂

  7. Gravatar of BH BH
    18. August 2013 at 11:50

    Hi Professor — Can you point me to the data where you see that monetary base growth dropped off in 2008 (“This sharp slowdown in base growth”)? I can’t find it when I look:

    It looks like continuity to me. (If this were the case, that means that the principle disequilibrium issue in 2008 was a surge in demand for money rather than drop in supply, is that correct?)

  8. Gravatar of reader223 reader223
    18. August 2013 at 12:00

    Bob, I think you’re confusing changes in the interest rate to the level of the interest rate. Raising rates away from the natural rate of interest results in tighter monetary policy while lowering rates closer will loosen monetary policy.

    However, you can’t just point to low interest rates and assume money is loose if the real rate is negative. Just like a 16% rate of interest is tight when the “natural” rate is 12%, a 0% interest rate is tight if the “natural” rate is -4%.

    I fail to see where Professor Sumner is contradicting himself with holding these two views. They aren’t the same thing.

  9. Gravatar of reader223 reader223
    18. August 2013 at 12:02

    edit: second paragraph, second line replace real with natural.

  10. Gravatar of Morgan Warstler Morgan Warstler
    18. August 2013 at 12:12

    Cullen, printing money and buying things is MP precisely bc the congress is not doing it.

    (One of the larger proofs you like to forget is the “independence” of the Fed. We created the damn thing in 1913, right when suddenly the Federal government threw a net over the wealthy. The fed is an insurance policy to make sure govt. bureacrats don’t get to big for their britches.)

    The Congress taxing and buying things or taking on debt and buying things is Fiscal.

    Amazing NOTE:

    Somehow PK has got Scott admitting words mean what the public thinks they mean. Which I find stunning.

    Because I’ve long argued here that econos shouldn’t call tax cuts Fiscal Stimulus or Fiscal Policy, because the public doesn’t think of that way.

    We ought to use a single idea for more govt spending, precisely so everyone admits once and for all tax cuts are not spending BECAUSE the public doesn’t think they are and BECAUSE they are not spending.

    (Lefties like to assert this bc they like to imagine that money (the idea) starts in the government hands, and thats junk.)

    The public’s truth is the government can’t spend what it doesn’t not tax, print, or borrow.

    Taxing someone less is not spending money on them… any more than not beating someone is making them healthier.

    Words mean something, and its profoundly shitty that economists allow themselves to discuss tax cuts as some kind of govt. largess of fiscal “stimulus”

    Tax cuts represent the HOPE that future government spending will go down, and that government will shrink. Tax cuts are an admittance that government’s ROI from taxes is shit.

    Tax cuts are an apology from a govt that is learning its lesson.

    Just as bad is “austerity” = as if we’re tightening our belt, instead of some other word that implies growing up, becoming stronger, leaner, meaner, healthier.

  11. Gravatar of Cullen Roche Cullen Roche
    18. August 2013 at 12:31

    Morgan, you’re changing the rules of the game. The Fed exists via act of Congress and the Fed Act specifies what they can and cannot purchase. If the Fed started buying bags of dirt they’d be overstepping the legal boundary. Bernanke won’t even buy Munis (which he is legally allowed to) because he knows it’s a fine line between fiscal and monetary.

    You’ll probably say they can use the exigent circumstances clause to buy things. Sure, but that’s in “exigent circumstances” and really has no relevance to setting a NGDP target and promising to permanently hit that target (unless “exigent” becomes a permanent thing, which is kind of voids the purpose behind the clause!).

    So, until the laws change the Fed is limited by what it can and cannot buy. And right now it’s basically limited to doing asset swaps and promising to do things it doesn’t really have the tools to achieve.

    So, until the Fed gets authority from Congress to become a fiscal entity I see this whole debate as interesting, but largely void of value. And if the Fed ever does get the authority to buy bags of dirt then the Monetarists will all become fiscalists and we can all go have a big party together.

    Btw, my entire world view starts with the private sector. That’s a big key to understanding endogenous money. It’s actually the neoclassicals who start with govt “printing money” and the MMTers who start with reserves and of course the Monetarists who also start with reserves. Yeah, the Fed’s independent, but it’s “independent within govt”. As I’ve described in detail, the real money printing is done by the banking oligopoly, not the Fed, not the US Tsy and not the US Congress.

  12. Gravatar of TravisV TravisV
    18. August 2013 at 12:36

    Prof. Sumner,

    Here is a good question I just thought of:

    Imagine if the Fed had successfully kept NGDP growing at 5% during 2008 and 2009. What do you think RGDP growth would have been during those two years?

    It would have been very low due to the oil supply shock, right? I’m just curious how low RGDP growth would have been (and how high inflation would have been).

  13. Gravatar of Rich Rich
    18. August 2013 at 12:42


    re: “(money)…starts in the government hands, and thats junk.” Pull a dollar bill out of your wallet and carefully examine it. Do you now believe the government has something to do with the production of that dollar bill?

  14. Gravatar of Jerry Brown Jerry Brown
    18. August 2013 at 13:19

    Professor Sumner, when you talk about the “stance” of monetary policy what do you mean? Are you talking about the aims or goals of the policy makers or the results of the policy? I have been reading you for a while and am still not sure.

  15. Gravatar of Morgan Warstler Morgan Warstler
    18. August 2013 at 14:31

    Rich, no.

    Just as I think the waitress and cook have nothing to do with my nutrition.

    I choose to eat there. They had better be glad to have me as a customer.

    This should help with Cullen too…

    When push comes to shove… is REALITY.

    The EXCEPTIONS are reality.

    That’s why you can’t bake insurance into securities markets – they WILL FILE CLAIMS.

    Rich, I have always and will always look at government and its employees, elected of not, as remoras. Simple commensalism.

    After we form the title office, every other part of government is simply servants to the hegemony.

    I don’t look at Obamacare or Social Security as good or bad, I think only about their efficiency and whether they reflect the will of hegemony (the top 1/3).


    Cullen, the ECB TELLS govts. what to do. Greenspan TOLD Congress to cut taxes and not run a surplus, he didn’t tell them to spend more.

    If you can’t look at when push comes to shove and accept that Fed = or > Congress, you are just being willfully naive, child-like.

  16. Gravatar of Negation of Ideology Negation of Ideology
    18. August 2013 at 14:57

    Cullen –

    “If the Fed started buying bags of dirt they’d be overstepping the legal boundary. Bernanke won’t even buy Munis (which he is legally allowed to) because he knows it’s a fine line between fiscal and monetary.”

    You raise two different issues here, legality and the definition of monetary policy. Whether an action is legal or not has nothing to do with whether it’s monetary or fiscal policy. It also doesn’t matter whether it’s Congress or the the Fed that does it. Consider the following examples:

    1. Congress issues $100 Billion in the old legal tender US Notes and buys dirt with it.
    2. The Fed issues $100 Billion in reserves and buys dirt with it.
    3. Congress auctions $100 Billion in US Bonds and uses the proceeds to buy dirt.

    1 and 2 are monetary policy; 3 is not. 1 would still be monetary policy if the Treasury didn’t buy dirt and instead reduced the amount of bonds it auctions. 2 would still be monetary policy if the Fed bought bonds and reduced the amount of bonds for private investors.

  17. Gravatar of ssumner ssumner
    18. August 2013 at 15:10

    Cullen, If I said it was all about the supply of base money there’d be a contradiction. But I said supply and demand. Since money demand is unstable the supply of base money is a lousy indicator. I don’t see the contradiction.

    And no, I don’t favor buying dirt.

    The Fed does monetary policy by setting expectations, and then providing the amount of base money for the monetary base market to be in equilibrium when NGDP expectations are on target. It’s that simple. And that’s fundamentally what they are doing even if they target nominal rates.

    And I don’t understand why people keep saying QE failed. They are tapering because they think it succeeded. The QE successfully offset the severe austerity. Mission accomplished!! And the Fed’s opinion is the only one that matters. (Of course I think they should do much more.)

    Bob, Yes, if I was going to be really complete I should have added more explanation. But I assumed everyone would see the ECB action as a policy aimed at slowing inflation and NGDP growth. I could have simply cited the fall in NGDP growth as “tight money” but I get tired of the “people of the concrete steppes” complaining. So I thought I’d point out that the ECB even tightened using conventional measures, so that there wasn’t any doubt. But of course that didn’t stop certain famous Keynesians from insisting that the ECB has been as the zero bound over the entire past 4 years, even though it hasn’t.

    BH, This link:

    In August 2007 the base is $858 billion, and it’s still $858 billion in May 2008

    Travis, I’d guess about 1% RGDP and 4% inflation. I’d guess unemployment rises to 6% or 6.5%. The fall in house prices is much milder. Oil might hit $175, or more.

    Jerry, What does anyone mean? That’s a very good question. I don’t know if it’s ever been defined. I’m trying to define it here. I mean whether money is too tight or too loose to hit the policy target.

  18. Gravatar of Geoff Geoff
    18. August 2013 at 16:15

    So is NGDP.

  19. Gravatar of Geoff Geoff
    18. August 2013 at 16:37

    I believe this is a great opportunity to mention one of the greatest lessons from Mises. Mises showed quite conclusively that the reason central planning (socialism) doesn’t work has nothing to do with the moral character of the central planners, or even the beliefs among the populace of whether or not the central planners are justified in doing what they are doing.

    It has to do with coordinating communication.

    A socialist economy has no price system for the means of production, and so the central planners have no access to the information needed to coordinate production rationally.

    A laissez-faire economy has an unhampered price system for the means of production, and there are no central planners.

    An economy like ours, which has no price system for the means of producing MONEY, but a price system for the means of producing a large quantity of goods exchanged against money, has no price information communicated in the production of money, and a hampered pricing system communicated in the production of real goods.

    A central bank has no access to the information needed to know whether or not they are creating too much or too little money commodity, because the needed information does not exist. This needed information are the profit and loss and pricing signals of allocating resources to the production of money itself in a context of economic competition, i.e. private property rights.

    A car company for example knows if it is producing too much or too little of a certain good by the information conveyed by the profit and loss pricing system. Too much and it incurs losses. Too little and profits will be too high and will attract other competitors into the market for that good.

    A central bank on the other hand is virtually IMMUNE from profit and loss. If it produces too much money, it will not incur market losses, and if it produces too much money, it will not have to deal with any competitors, since competition is banned by law (that’s why we call it central banking).

    There is no information revealed WITHIN a central banking economy that can ever substitute for a market in money. This is why every single statistic so far “targeted” by central banks have not prevented booms and busts, and why they continue to hamper the economy. They are blindfolded by virtue of having a monopoly!

    So really, what is actually true is not only that nominal interest rates in a central bank hampered economy are a lousy “indicator” of money, but any and all “indicators” within the central bank hampered economy are lousy as well. None can ever substitute a competitive profit and loss system in the production of money itself.

    Please note that this is not an advocacy for private money, even though I myself do act in accordance with private property rights, and so must consider myself an “advocate” of private money. This is more an analysis of what happens when money is monopolized by a state, subject to no profit and loss signals in a context of competition.

  20. Gravatar of Saturos Saturos
    18. August 2013 at 17:23

    Well Scott, you and I think that NGDP is determined by the supply and demand for holding the monetary base. So if we judge the stance of policy by looking at inputs, we should tell people to look at the Fed’s actions over supplying the stock of base money, plus its broadcast intentions over controlling the demand for the stock of base money. Of course that demand largely depends on where the public believes the output of monetary policy to be in the coming years. Which just goes to show that you cannot just talk about inputs, at least not if your aim is level-targeting the output (which is precisely what best controls the input).

  21. Gravatar of Cameron Cameron
    18. August 2013 at 17:58

    So much for Abenomics being beggar thy neighbor: Japan exports rise, but imports rise more.

  22. Gravatar of Rajat Rajat
    18. August 2013 at 18:01

    Scott, you are pretty sure Bernanke follows your blog or has someone follow it. That makes sense. Any reason why the great Paul Krugman can’t do the same and engage with you and your arguments a bit more usefully? I fully accept Krugman has a bigger ego than Bernanke, but surely despite being a Nobel-prize winner and NYT blogger, he must have sufficiently more free time than Bernanke to offset the effect of the bigger ego. Or have I still underestimated the size of Krugman’s ego?

    I hope to see you in Sydney next week. It would mean flying up from Melbourne for the day, so it will have to depend on workload!

  23. Gravatar of Ben J Ben J
    18. August 2013 at 19:17


    I’m flying down from Brisbane, so you have no excuses!

    But seriously, I’m looking forward to it.

  24. Gravatar of Benjamin Cole Benjamin Cole
    18. August 2013 at 20:51

    Well, as a lay-economist, i do not have much to add.

    But PR wise…I think the MM movement could do better.

    We need to constantly rebut headlines that talk about “Fed easing” if we believe that fed is actually “passively tight.”

    And all this diarrhea about “tapering down.” We should be encouraging the Fed to “taper up” until we see 5 percent unemployment or 5 percent inflation.

    Do not get me wrong. Sumner’s blog has been instrumental. But PR wins the policy wars, and logic only plays a supporting role.

    My below MM’ers: If you see a news story that talks about the “Fed being loose” send a letter to the editor, or comment on the story.

    The Fed is practicing monetary asphyxiation. Let people know that.

  25. Gravatar of ssumner ssumner
    18. August 2013 at 23:09

    Saturos, I agree.

    Cameron, Good point.

    Rajat, I’m pretty sure he’s aware of the blog, I doubt he reads it very often.

    Ben, I hope to see you and Rajat there.

    Ben Cole, Yes PR is not my forte, but I don’t think I’m doing all that poorly.

  26. Gravatar of TravisV TravisV
    19. August 2013 at 05:54

    Phenomenal analysis by Yichuan Wang here:

    His conclusion? The same one as mine: positive supply shock!

    Now he really needs to write a post titled “The Stagflationists ARE WRONG!”

    And he needs to analyze this paper by David Rosenberg step-by-step and demolish it.

  27. Gravatar of Full Employment Hawk Full Employment Hawk
    19. August 2013 at 07:19

    “Here are some possible indicators of the stance of monetary policy:”

    Why is M1 not listed? It is a measure of the medium of exchange in the economy. And it is money’s role as medium of exhange that makes it unique among financial assets. Most of Non-M1-M2 are liquid assets that do not serve as medium of exchange. In addition their structural connection to the monetary base is extremely tenuous.

    The introduction of sweep accounts complicates this somewhat and what we need is an M1+ aggregate that includes them.

  28. Gravatar of Full Employment Hawk Full Employment Hawk
    19. August 2013 at 07:26

    “inflation expectations haven’t moved much, and nominal interest rates have, in practice, been a pretty good guide to the stance of monetary policy.”

    The IS-LM model shows why nominal interest rates are not a good guide to the stance of monetary policy even when inflation expectations are constant.

    Low interest rates can be caused either by a shift in the LM curve down and to the righ (easy money) or a shift in the IS curve down and to the left (a weak economy).

  29. Gravatar of ssumner ssumner
    19. August 2013 at 09:09

    TravisV, I agree that Yichuan’s post is excellent, but I have some doubts about the supply-side hypothesis. I don’t regard the S&P 500 as a particularly reliable indicator of NGDP growth.

    And I don’t think the Rosenberg post is all that bad. His hypothesis is defensible, although on balance I probably expect less inflation than he does.

    FEH, Good point in your second comment, but of course that also begs the question of what we mean by the stance of monetary policy. It’s appalling that economists have never defined such an important term.

  30. Gravatar of ssumner ssumner
    19. August 2013 at 09:12

    Travis, BTW, I did a post on the same topic as Yichuan back in 2011, but it’s more timely than ever:

  31. Gravatar of dtoh dtoh
    19. August 2013 at 09:55

    How well does Base minus Excess Reserves work. How well does it track NGDP?

  32. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. August 2013 at 10:29

    Maybe a bumpersticker is needed; ‘NGDPLT is the worst monetary policy…except for all the others.’

  33. Gravatar of Max Max
    19. August 2013 at 10:38

    dtoh, when looking at currency, keep in mind that a lot of U.S. currency is used outside the U.S. This demand can fluctuate independently of GDP.

  34. Gravatar of TravisV TravisV
    19. August 2013 at 11:53

    Prof. Sumner,

    You wrote:

    “I don’t regard the S&P 500 as a particularly reliable indicator of NGDP growth.”

    (Gasp) Are you saying that stock prices have increased so much due to a…..BUBBLE???


  35. Gravatar of W. Peden W. Peden
    19. August 2013 at 12:07


    Better, with a velocity that usually changes due to changes in interest rates-,FEDFUNDS&scale=Left,Left&range=Custom,Custom&cosd=1986-01-01,1986-01-01&coed=2013-07-01,2013-07-01&line_color=%230000ff,%23ff0000&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=c%2F%28a-%28b%2F1000%29%29,a&fq=Annual,Annual&fam=avg,avg&fgst=pc1,lin&transformation=lin_lin_lin,chg&vintage_date=2013-08-19_2013-08-19_2013-08-19,2013-08-19&revision_date=2013-08-19_2013-08-19_2013-08-19,2013-08-19

  36. Gravatar of OhMy OhMy
    19. August 2013 at 12:15

    “How well does Base minus Excess Reserves work. How well does it track NGDP?”

    The required reserves track the demand for credit, they are endogenous (after banks have made loans they convert some of their assets to reserves as required). Required reserves track GDP OK but it tells you nothing about causality: reserves -> GDP which is not there.

  37. Gravatar of Greg Ransom Greg Ransom
    19. August 2013 at 12:59

    If everyone has a different judgment of what guides what and how much it guides this and that, then Scott’s invented, strickly non-Fama version of “EMH” doesn’t work — it *EXPODES*.

  38. Gravatar of Tom Tom
    20. August 2013 at 04:42

    I continue to claim that the best indication of monetary policy, in practice, is (11) the amount of loans being giving out by banks.
    When money is loose, there’s a lot.
    When money is tight, there’s not.

    I’m continually annoyed so few Monetarists or macro folk look at bank lending in much detail. (It’s too much for me to — I work for a living at some big company.)

  39. Gravatar of W. Peden W. Peden
    20. August 2013 at 05:44


    Perhaps it’s the best indicator, but it can still be a very misleading one at times e.g. firms and households will want to borrow more in a recession (distress borrowing) and you can have wild swings in the money supply that are quite separate from bank lending e.g. because the banks are changing the structure of their liabilities.

  40. Gravatar of OhMy OhMy
    20. August 2013 at 05:46


    Scott Sumner said “I have no interest in banking or bookkeeping. My interest is monetary policy.”. This is typical of “monetarists”. How can they do the latter without the former is anybody’s guess.

    If you want economists who look how the world works read “monetary realists” and “modern monetary theorists”.

  41. Gravatar of AldreyM AldreyM
    20. August 2013 at 06:17

    JP Koning comment on Cullen post:

    You refer to dirt buying as fiscal policy. I’m not really sure why it is important to call it fiscal or monetary policy. But in focusing on dirt buying as the sole lever, you’re forgetting Miles Kimball’s plan, which involves floating the conversion rate between notes and deposits and then pushing IOR below 0. Whether you call it fiscal or monetary policy, if implemented, Miles’s plan would give the Fed a surefire Archimedean lever “” without the necessity of buying dirt!

  42. Gravatar of dtoh dtoh
    21. August 2013 at 03:27

    Sorry. Can’t tell what I’m looking at on the graph you linked.

    Oh My,
    I was asking about RR. I was asking about MB-ER (i.e. RR plus cash).

  43. Gravatar of dtoh dtoh
    21. August 2013 at 03:28

    Oh MY,

    Correction – I was NOT asking about RR.

  44. Gravatar of W. Peden W. Peden
    21. August 2013 at 04:34


    The blue line is the annual percentage change in the velocity of the monetary base less excess reserves.

    The red line is the annual change in the federal funds rate, so you can see the interest rate sensitivity of the demand for the abovementioned aggregate.

  45. Gravatar of W. Peden W. Peden
    21. August 2013 at 04:35

    (I divided excess reserves by 1000 because the series is in millions and the other two in that calculation are in billions.)

  46. Gravatar of flow5 flow5
    21. August 2013 at 10:36

    The Fed’s supposed to “control the money supply”. Required reserves represent the volume of transaction based accounts 30 days prior. 93%-96% of all demand drafts clear thru these transaction based accounts (our “means-of-poayment” money).

    Every time the economy (or stocks) have headed south, the growth in legal reserves has either decelerated or absolutely declined. Of course, rates-of-change in the money stock times its rate-of-turnover are relative to the growth of new goods & services. So required reserves matter greatly.

    However, the transactions velocity of money flucuates 2.5 times greater than the supply of money. It was Vt that has vaulted during 2013 & that is why rates took off in May.

  47. Gravatar of flow5 flow5
    21. August 2013 at 10:38

    The best metric for economic activity is bank debits. That was the finding of the 1931 committee on bank reserves that was declassified on March 23, 1983.

  48. Gravatar of ssumner ssumner
    21. August 2013 at 12:27

    Dtoh, No, it’s not very reliable in the short run. Currency demand depends on interest rates.

    Travis, Lots of factors affect stock prices, NGDP is just one of them.

    Tom, Loans reflect credit conditions, not monetary conditions.

    Aldrey, All that discussion implies the Fed is having trouble boosting AD. DO PEOPLE NOT KNOW THAT THEY ARE ABOUT TO TAPER!!!!!!

    The Fed has more than enough tools without gimmicks. They are hitting their targets so well that they are about to taper. They don’t need new tools. They need a new TARGET.

  49. Gravatar of dtoh dtoh
    21. August 2013 at 17:12

    Dtoh, No, it’s not very reliable in the short run. Currency demand depends on interest rates.

    I’d like to see the data. Depends or is correlated. And is based on absolute rates or changes in rates?

  50. Gravatar of Rajat Rajat
    21. August 2013 at 19:18

    Scott, Ben J, I’m locked and loaded! Looking forward to seeing you both. Any chance for lunch and/or a beer afterwards?

  51. Gravatar of ssumner ssumner
    23. August 2013 at 22:54

    dtoh, Both.

    Rajat, I look forward to meeting you. Perhaps we could chat afterwards, I don’t know my schedule yet.

  52. Gravatar of Tom Hickey Explains MMT to Sumner | Last Men and OverMen Tom Hickey Explains MMT to Sumner | Last Men and OverMen
    18. February 2017 at 07:38

    […] […]

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