Krugman now favors unconventional monetary policy!

You may recall that in a recent blog post Krugman disagreed with the idea that unconventional monetary stimulus could help boost the economy.  He also denied ever supporting that view.  Well, you’ll be happy to hear that Krugman does now support unconventional monetary stimulus.  Here is the quotation from his blog:

The problem, of course, is that you can’t cut interest rates below zero (if you try, lenders will just hoard cash.) So the Fed simply can’t do what the rule says it should.

This is why we need a huge fiscal stimulus, unconventional monetary policy, and anything else you can think of to fight this slump. Quite literally, the usual rules no longer apply.

For those interested in the earlier tussle, Krugman linked to my blog where I had written an open letter to him making the following points:

Dear Mr. Krugman,

Since last October I have been worried that nominal GDP growth would fall far short of the level consistent with full employment.  Last fall I forcefully presented this argument to a number of economists (and was fortunate that Greg Mankiw and Robert Barro were willing to spend more than an hour listening to my views.)  I suggested that despite the near-zero interest rates, an unconventional monetary policy could still be highly effective.

Because you are currently the most influential progressive voice on economic issues, and because you are an expert on liquidity traps, and because you have been skeptical about the effectiveness of monetary policy in the current environment, I decided to write you in the hope that you will reconsider your views on monetary policy.  Not reconsider your model of  “expectations traps,” but rather consider whether things have gotten so bad that the risks of a highly unconventional monetary policy are now outweighed by the risks of not adopting such a policy.  . . .

I think you have acknowledged that there is some level of quantitative easing that would boost demand.  If I am not mistaken you are concerned that if such a policy boosted inflation expectations sharply, the Fed would have to quickly sell off these assets, suffering massive capital losses.

The bold was just added, so that you can clearly see that I mentioned “unconventional monetary policy” several times.  He replied to the letter as follows, I’ll let the readers judge for themselves:

A quick response to Scott Sumner

OK, I see that Scott Sumner has written an open letter to me. But I’m puzzled. He writes:

“I think you have acknowledged that there is some level of quantitative easing that would boost demand. If I am not mistaken you are concerned that if such a policy boosted inflation expectations sharply, the Fed would have to quickly sell off these assets, suffering massive capital losses.”

Um, you are mistaken. I’ve never said such a thing. Did you mean to address this letter to someone else?

No Mr. Krugman, it was addressed to you.  I’m glad to hear you now favor unconventional monetary stimulus—better late then never.  If only the economics community as a whole had understood the need for this back in October (when I was trying to wake people up) we wouldn’t be in this mess.

BTW:  If anyone knows Mr. Krugman, perhaps they could ask whether he is now willing to sign my petition advocating unconventional monetary stimulus.  And if not, which version of monetary stimulus he prefers.

Update (3/10/09):  A commenter took me to task for the “shrill” tone of this piece.  He is probably right, as I was annoyed on finding this earlier statement by Krugman after his dismissal of my letter.  The second to the last paragraph was sarcastic.  But the last one is actually more sincere than you might have thought.  I do think that Krugman’s January views represent his actual views on this issue.  I think he does agree that unconventional monetary stimulus is worth trying.  I believe he might support some of the ideas in my petition.  I doubt he’d sign it, but if he supports a different type of unconventional monetary stimulus, I’d be sincerely interested in knowing the details of his preferred approach.



11 Responses to “Krugman now favors unconventional monetary policy!”

  1. Gravatar of Pandora Pandora
    8. March 2009 at 12:13


    Your gentle voice may help create new thinking. Please don’t worry about being right, it’s the wrong battle. Concentrate on being heard.

  2. Gravatar of TGGP TGGP
    8. March 2009 at 13:06

    Rather than linking to the page (which will become obsolete as more posts push it back), link to the post:

  3. Gravatar of billwoolsey billwoolsey
    8. March 2009 at 13:08

    I think interest rates on the shortest T-bills, insured saving and checking accounts, and reserve balances at the Fed–just negative enough so that some people in fact do start to “hoard currency.” Any currency people what to hoad can be supplied, and then at that point, the Fed needs to purchase higher risk and longer term secuities.

  4. Gravatar of ssumner ssumner
    8. March 2009 at 13:30

    Thanks for the support Pandora. I wil ltry to be tougher.

    TGGP, Thanks, I changed the link to the specific post.

    Bill, I do worry a bit about currency hoarding–you are right that T-bill yields could go slightly negative, reflecting the cost of holding cash–indeed I think that happened in the late 1930s. That’s why I have always put more weight on my other ideas—especially turning around inflation expectations. I strongly believe that with a expansionary package including many provisions designed to attack both money supply and money demand, as well as an explicit target and a commitment to engage in level targeting, expectations would turn around rapidly and we’d never have to do much. Every liquidity trap in history has reflected a passive monetary policymaker, unwilling or unable to press the issue and commit to inflation. The Fed still hasn’t done any of the things I am asking for, much less all of them. But you are right, slightly negative interest rates are a theoretical possibility–and that could lead to cash hoarding

  5. Gravatar of JimP JimP
    8. March 2009 at 14:16

    Yes – its that Bernanke passiveness that I really do not get. He must know what is going on. He must know he is below target. Why does he not do something? You said in a previous post that it must be because of the power of old ideas – the fear of inflation on the board. But that paper Krugman mentions says that by the Taylor rule we should be at 6% negative rates! Minus 6%. That just must mean we need 6% inflation – the whole board must know this. They must !!! What in the dickens could possible be going on ?

  6. Gravatar of Jeffrey Yasskin Jeffrey Yasskin
    8. March 2009 at 16:59

    Although I was wrong (and disappointed) that Krugman would be receptive to your open letter, I’m still pretty sure that he’s always been in favor of unconventional monetary policy in addition to fiscal policy. In your letter, you wrote

    “I think you have acknowledged that there is some level of quantitative easing that would boost demand. If I am not mistaken you are concerned that if such a policy boosted inflation expectations sharply, the Fed would have to quickly sell off these assets, suffering massive capital losses.”

    and he replied, “Um, you are mistaken.” You’ve been responding as if he were disclaiming that “there is some level of quantitative easing that would boost demand.” If instead he was denying being concerned about Fed losses (which is supported by his use of “mistaken” to match your introduction to your _second_ sentence, not your first), then there’s no contradiction between his 1998 paper I pointed to last time, his response to you, and this latest post.

    Of course, we shouldn’t have to parse his words this closely to make sense of them. A Nobel prize doesn’t give an infinite license to be pissy and obscure.

  7. Gravatar of ssumner ssumner
    8. March 2009 at 19:42

    Jim, I think the Taylor rule is too focused on inflation. What really matters is nominal GDP growth. We don’t even need 6% inflation, if we had 6% nominal growth I would estimate that we’d get 2% inflation and 4% real growth. And that (or expectations of that) would be plenty to get us out of the liquidity trap.

    Jeffrey, I’m afraid that it’s even worse than you think. If you read the full Krugman post it is crystal clear he is focusing the the impotence of monetary policy, not the cost. Right after the part I excerpted, he goes on to argue that monetary policy can do nothing because nominal interest rates have fallen to zero. So he did explain exactly which part of my comment he was upset about. In addition, just a few weeks earlier he argued that unconventional policies were risky because the Fed might suffer capital losses. I discuss this earlier post in my “Reply to Krugman” post.

  8. Gravatar of Jonathan Dean Jonathan Dean
    8. March 2009 at 21:41

    Dr. Sumner, In my opinion, your posting here borders on the shrill. I believe that, in the long run, it is the continued and sincere discourse between knowledgeable economists that will shorten the length of this. Everything possible must be done to prevent these arguments from becoming ad hominem. Thank you, though, for your knowledge and commitment to resolution.

    Regards, Jonathan.

  9. Gravatar of @zmyth @zmyth
    9. March 2009 at 08:26

    Fire up those helicopters! If people want to hoarde cash, let them. If we expand M0 to the point where it matches currency demand, people will be able to nominally save (S-I) to their heart’s content. As long as claims on real goods do not exceed our capacity to produce them, inflation should not be a problem.

  10. Gravatar of R McGarry R McGarry
    9. March 2009 at 12:06


    You may have seen the following in Christina D. Romer’s Lessons from the Great Depression for Economic Recovery in 2009 presented to the Brookings Institution today:

    “A second key lesson from the 1930s is that monetary expansion can help to heal an economy even when interest rates are near zero. In the same paper where I said fiscal policy was not key in the recovery from the Great Depression, I argued that monetary expansion was very useful. But, the monetary expansion took a surprising form: it was essentially a policy of quantitative easing conducted by the U.S. Treasury.”

    At the very least, it is good to see that one of the crafters of the administration’s recovery plan continues to hold such a view.

  11. Gravatar of ssumner ssumner
    9. March 2009 at 16:01

    Jonathan, You may be right. I admit I was a bit annoyed when I read what Krugman had said in January, especially after how he responded to my letter. Was there anything inaccurate in my reply? How about in Krugman’s reply to me?
    I should add that my last comment about the petition was not really intended to be sarcastic–if he supports unconventional monetary stimulus, and I think even you would concede that he says its worth trying, then I see no reason why he would not sign the petition. If he has a reason, I’d like to hear it. I guess my feeling is that if he doesn’t want to have a conversation with me, fine, ignore me. Don’t accuse me of making things up and then disappear when it is shown he was wrong.
    Having said all that, I like your attitude Jonathan–civility is important. I wish Krugman and I could have a civil discourse. I hope you will continue to criticize me if I cross over the line.

    Thanks R Garry, It is in today’s post.

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