Liquidity traps and obesity traps
I once compared liquidity traps to obesity traps, but I can’t find the link. The basic idea is that a person is stuck in an “obesity trap” if they cannot reduce weight without doing one of the following three things:
1. Diet
2. Exercise
3. Surgery
Experts agree that those three steps would lead to weight loss, but they may require too much self control (diet, exercise) or expensive and painful surgery. The obesity “trap” results from the fact that it’s difficult to lose weight if you rule out taking one of those three steps.
Similarly, there are steps that experts agree would eliminate the liquidity trap problem:
1. A higher inflation target
2. Level targeting (P or NGDP)
3. Chuck Norris approach (promise to buy whatever it takes)
4. Currency depreciation
Paul Krugman prefers #1, I prefer both #2 and #3. But for various reasons central banks generally don’t want to do any of those 4 things. Instead they prefer to do two things that, while being mildly effective, may still fall short of what’s required to hit their target. Those two things are QE and negative IOR.
Over at Econlog, Bryan Caplan added a 5th idea to the list of things that would work, but that the Fed does not want to do. He suggests that we could convert all public debt into consols. Then interest rates would never hit the zero lower bound, because it would imply an infinite price of consols. This might well work, but central banks would not want to do this because it might expose them to a high level of asset price risk. Indeed concern about asset price risk is what led Switzerland to switch to a much tighter monetary policy back in early 2015. So add Bryan’s idea to the list of things that would work, but that central banks do not want to do.
PS. Over at Econlog, I have a piece discussing Hillary’s views on Fed restructuring.
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13. May 2016 at 07:27
How about consols that paid zero interest? Oh wait! That’s cash.
13. May 2016 at 08:40
I agree with you that ethnicity should be irrelevant for those making monetary decisions at the fed. But diversity in professional backgrounds is def needed. What are the implications that a revolving door exists between the fed and the private sector? Couldn’t this jeopardize the Fed’s independence?
By all means if white jewish males are the best then let them represent but bankers do not have a monopoly of knowledge in monetary policy. Seeking diversity in professional backgrounds is a worthy pursuit.
13. May 2016 at 09:27
@elizondo
What exactly is a “white Jewish male”?
13. May 2016 at 11:11
Oderus
read Sumners post econlog and you’ll understand why I said that
13. May 2016 at 11:16
The phrase Dr. Krugman uses is central banks need to credibly promise to be irresponsible. So, isn’t that 1 together with 3? Isn’t it true that Dr. Sumner and Dr. Krugman both believe that if liquidity trap conditions exist the central bank needs to change nominal spending expectations? They differ in that Dr. Krugman goes on to say changing inflation or NGDP path expectations is very hard (see Japan) so you need fiscal stimulus while Dr. Sumner says level targeting will get you there.
13. May 2016 at 11:24
Scott,
Your analysis of helicopter money makes absolutely little sense in the context of conventional forward looking macro.
If you make make reserves always in strict surplus, by monetizing some fraction of the debt, and then use an institutional fact to remunerate them at zero (as arbitrary as remunerating them at .25 or -.25 forever), then if your policy is perfect understood, short term interest rates will ALWAYS be zero by arbitrage. This policy then is just monetary base targeting under a permanent interest rate peg (with the fact that the peg happens to be zero confusing most people). Is this in fact the policy suite you have in mind for how helicopter money would work? You simply can’t do helicopter money and interest rate policy. So then the question becomes, for how long are you abandoning your interest rate control, and what happens thereafter.
13. May 2016 at 17:48
Sumner, why not advocate for the government to force diet, exercise and surgery on people, the way you do so for the fiat toilet paper monetary system?
Since you’re comparing them and all. You know, being “pragmatic”.
13. May 2016 at 18:20
James, You said:
“By all means if white jewish males are the best then let them represent but bankers do not have a monopoly of knowledge in monetary policy.”
In my view, most bankers don’t have much knowledge of monetary policy (except of course those who read my blog), I don’t want them on the Fed. Just experts on monetary policy.
Oderus, You asked:
“What exactly is a “white Jewish male”?”
Someone who is:
1. White
2. Jewish
3. Male (Not necessarily by birth, but that’s their gender identity.)
Captain, You said:
“They differ in that Dr. Krugman goes on to say changing inflation or NGDP path expectations is very hard (see Japan) so you need fiscal stimulus while Dr. Sumner says level targeting will get you there.”
He sees a higher inflation target as an alternative to fiscal stimulus.
Tyler, I don’t understand your question–I don’t favor helicopter money.
13. May 2016 at 18:26
so you support Hillary’s desire to diversify the fed in terms of professional background? after all she wants less bankers to sit on the board
13. May 2016 at 18:51
James, No, check out my Econlog post. I want nothing but monetary policy experts. Those are likely to be mostly academics. You can have a few bankers on the banking committee, but not the monetary committee.
14. May 2016 at 06:57
[…] Sumner, “Liquidity traps and obesity traps”(TheMoneyIllusion, May 13, […]
14. May 2016 at 07:29
@summer
Gender identity? You’ve really gone full-retard I see.
14. May 2016 at 11:25
Oderus Urungus
Are 13 years old? Or you’re an adult that never finished highschool. 1 of the two.
14. May 2016 at 17:37
You have some smart commenters on Econlog, but it is worth reinforcing that Hillary’s comment about “diversity” on the Fed is strictly about physical appearance: race and gender. It has nothing, I repeat, nothing, to do with professional diversity.
If you look at Hillary’s rhetoric in other areas, e.g., that the executive branch would “look like America” including 50% women, it’s clear that Hillary is focused entirely on politics of race and gender division. Projecting “intellectual diversity” onto her statement is positively Trumpist in logic.
I agree with the Econlog poster who argues that nothing Hillary says should be taken seriously. Getting bankers off the Fed is also not about better monetary policy; it is about appealing to Bernie voters. (Any policy benefit would be strictly serendipity) Meanwhile Chelsea’s husband reportedly lost 90% of his investors money in his hedge fund. Bad bankers!
Hillary’s campaign strategy is simple. 75% of America is “NOT white men”. Get over 60% of notwhitemen and fool 20% of the whitemen and you win the election.
22. June 2016 at 04:26
Regarding Mr. Caplan’s idea: Yes, finally!
Here’s my two cents,
Issuing consols: do so indeed, and also peg the price such as to provide a set interest rate forever (buy and sell unlimited quantities at the given price). The fixed nominal yield curve might be enough stabilization; if not, try to keep the total value of consols outstanding growing at the same rate as the interest rate you have targeted (might require using OMOs or currency management).
If the fixed nominal yield curve is too scary, then just promise to buy or sell unlimited quantities at a given price which shall be reviewed monthly; change the price to the degree needed to ensure that the total stock of consols outstanding keeps growing at the desired rate, as above.
In the long run, both approaches should be the same, and both take care of the asset price risk consideration.
No need for the whole NGDPLT market at all.
22. June 2016 at 08:12
Someone who is:
1. White
2. Jewish
3. Male (Not necessarily by birth, but that’s their gender identity.)
White’s pretty obvious (and verifiable with genetic testing). Jewish is now a fuzzy category because there’s so much inter-marriage and soi-disant Jews are so irreligious (note, for example, that Brian Caplan and his children now qualify under the Law of Return but would be recorded as gentiles in Israeli statistics). As for your remarks re the 3d, example #637 that the Mercatus crew are the Yevtuschenko’s and Voznesensky’s of the academic world. Example #636 was Tyler Cowen’s snippy complaint that so-and-so did not use a feminine pronoun when referring to Donald McCloskey.