Mark Sadowski finds the smoking gun

I don’t know how Mark Sadowski has time to find all this stuff, but if he were to become a blogger he’d immediately be one of the top macro bloggers in the world.  In any case he dug up a comment from 2010 that pretty much proves that Nick Rowe, Paul Krugman and Brad DeLong are right.  Steve Williamson is misinterpreting the equilibrium relationship between inflation and interest rates.

The comment was left at the end of a Andy Harless post, which I read several times.  I cannot even find a tiny error in Andy’s post—it seems exactly right.  And Williamson completely misses the point in his comment:


You’re making no sense. What Narayana is arguing is just standard monetary theory. If the central bank targets the nominal interest rate at a low enough rate forever, you have to get deflation. By arguing against this you’re making yourself look silly. By the way, Narayana, was born in the US. His mother is American, his father was Indian (thus the name), and he grew up in Winnipeg. A brilliant man.

The problem here is not so much the analysis—if he had said “you have to get deflation if the system doesn’t completely blow up” he’d be basically correct.  So why am I nitpicking?  Because Andy says as clearly as anyone could want that the long run equilibrium will be either deflation or the system blowing up:

It’s true that a low fed funds rate can exist, in long run equilibrium, only if people expect deflation (or if money is worthless).

Andy’s criticism of Kocherlakota was aimed at the claim that the Fed might need to consider raising rates to avoid deflation.  The ECB tried that in 2011.  How’s it working out?

Williamson had absolutely no reason to call Harless’s post “silly.”  That’s makes me think he did not understand the point, and that he agrees with Kocherlakota.  I’m pretty sure that even Kocherlakota no longer agrees with Kocherlakota.  It’s an indefensible argument.

BTW, I do agree with the last sentence in the Williamson quotation.  But does Williamson still believe that?



19 Responses to “Mark Sadowski finds the smoking gun”

  1. Gravatar of SG SG
    3. December 2013 at 11:27

    It’s almost enough to make me throw my hands in the air and follow Noah Smith to the land of postmodern macro in which no one can ever know anything.

    And then I remember that everyone who has ever been confused about monetary policy has subscribed to the manifestly false (insane?) notion that the central bank can’t control inflation for some reason or other.

    The market monetarists are the only bloggers who have not been confused on that one critical point.

  2. Gravatar of TallDave TallDave
    3. December 2013 at 13:48

    SG nails it. Once you understand, all this bickering over deflationary models just seems ridiculous.

    the Fed might need to consider raising rates to avoid deflation.

    If you want to avoid the possibility of rolling backwards, maybe you should set your target speed at something other than 1-2 MPH. OK, it’s an imprecise analogy, but why is not obvious to everyone that CB inflation targets set upper limits on inflation? If we had NGDPLT that effect would be greatly ameliorated and we wouldn’t need as much QE.

  3. Gravatar of TravisV TravisV
    3. December 2013 at 14:18

    “SG nails it,” I agree.

    However, taking a step back, the biggest divide is between those who recognize that the main problem is lack of aggregate demand and those who don’t. Paul Krugman, for example, is definitely an ally in that respect, although he frequently disappoints with additional vague suggestions that the Fed is “out of ammo”……

  4. Gravatar of TravisV TravisV
    3. December 2013 at 14:21

    Which incorrect notion is more dangerous: inability to recognize the shortfall in aggregate demand or, as SG says, the “notion that the central bank can’t control inflation for some reason or other.”

  5. Gravatar of Daniel J Daniel J
    3. December 2013 at 14:54

    He wasn’t very forgiving to Kocherlakota whenever his opinions changed and he backed a more expansionary policy.


    Quote: “Central banking, however, is not his calling, and he should quit – and do everyone, including himself, a favor.”

    No mercy…

  6. Gravatar of ssumner ssumner
    3. December 2013 at 16:00

    SG, Yes, MM is the only view that’s held up well over the past 5 years, everyone else has fallen by the wayside. Keynesians, Austrians, MMTers, new classicals, old monetarists, etc.

  7. Gravatar of Geoff Geoff
    3. December 2013 at 17:36

    There is a tiny error in Harless’ post. It occurs when he says this:

    “Suppose that the Fed were to keep the funds rate near zero but people began to be dissatisfied with that rate and began anticipating the 1% to 2% long-run real rate. What would happen? People would stop lending short-term money to the government at the near zero rate and instead start lending money elsewhere – for longer terms and to riskier borrowers. The more this continued, the easier it would get to borrow money. The easier it got to borrow, the more people would buy with the borrowed money, and the higher the prices of those purchases would go. And prices would continue going higher until…when?”

    Prices can only keep rising if there is a continuous rise in the quantity of money. Merely borrowing and spending cannot, on its own, put any upward pressure on prices. For if borrowing did not increase, then the providers of loanable funds could potentially invest in equity instead, or they could consume for themselves. In all alternative scenarios (except cash hoarding) there is no upward pressure on prices that comes from lending per se. Lending is but one form of investment. There are many others.

    Now there is some truth to what Harless says here, but it requires an important caveat, namely, borrowing and spending could potentially raise prices, if the loaned funds are ex nihilo funds, that is, if the bank expands credit beyond its reserves. That credit of course is accepted as money, and so here it could increase prices because such lending increases the money supply.

  8. Gravatar of Bonnie Bonnie
    3. December 2013 at 19:29

    I vote for Mark to start a blog. His guest posts over on Marcus’ blog are superb. I would certainly be a frequent visitor. Otherwise, I have no comment on the subject matter as I don’t really understand it. Is it a twist on the more forward way of putting *low interest rates are a sign money has been tight*?

  9. Gravatar of SG SG
    3. December 2013 at 20:12


    You ask a great question. According to Christy and David Romer the most dangerous idea in the history of the Federal Reserve is that monetary policy doesn’t matter.

    It’s fascinating. Christy Romer is one of the only examples I know of a prominent progressive economist that has (1) come to understand the critical importance of the Fed’s role in exacerbating the Great Recession and (2) given full-throated support for changing the fed’s analytical framework. Other prominent economists on the left still cling to the utterly discredited notion that the Fed has stopped steering the nominal economy at the ZLB. And they fail to see that their partisan commitment to promote fiscal expansion is just as wrongheaded as the right’s commitment to fighting nonexistent inflation. Both sides’ ideologies are basically impervious to reason.

    I think every single person who has anything at all to do with the fed should be forced to read the Romers’ paper.

  10. Gravatar of Benjamin Cole Benjamin Cole
    3. December 2013 at 20:15

    I vote for the Fed to hire Mark Sadowski–in fact, why has not the Fed ever organized a conference, along the lines of “Market Monetarism: Does it Offer A Path Forward for Monetary Policy?”

    Incredibly, to my knowledge, the Fed has never convened a lot of Market Monetarists and at least listened, even if only at a semiformal gathering.

    Think about how obdurate that is.

    Is the Fed saying, “With 500 economists on staff, we don’t need to listen to anybody. We own this space.” I think so.

    As for lower nominal interest rates causing deflation…only if such interest rates were obtained by a chronically tight monetary policy. Which is close to where we are now….

  11. Gravatar of Steve Steve
    3. December 2013 at 22:41

    I’m just a dumb non-macro guy with a question that perplexes me. Doesn’t Chuck Norris beat up all the other macro guys, including Kocherlakota, Krugman, and even Sadowski?

    Consider the following two scenarios:

    A) The Fed raises rates because it wants to “prevent bubbles” or “lower oil prices”.

    B) The Fed raises rates because it wants “higher inflation”.

    Scenario A is clear to me. Asset prices/inflation breakevens/NGDP expectations all decline.

    But Scenario B isn’t clear at all. True, the Fed’s message is incoherent. But if the *intent* is to raise inflation, couldn’t the market look past the higher rates and recognize that there will almost certainly be an offsetting move in the future? It might be a rate reversal, relaxed financial regulation, somewhat low rates for much longer, or end of IOER. But whatever it is, wouldn’t the market presume it would be geared toward actually acheiving the goal, even if the initial choice of instrument was nonsensical?

  12. Gravatar of ssumner ssumner
    4. December 2013 at 05:46

    Steve, Yes, but the point is that the Fed does not behave that way.

  13. Gravatar of TravisV TravisV
    4. December 2013 at 06:14

    Another great comment, SG, thanks!

    SG WINS the comments section! 🙂

  14. Gravatar of Brian Donohue Brian Donohue
    4. December 2013 at 07:01

    Great post. Kudos to Scott, Sadowski, and SG.

  15. Gravatar of James Oswald James Oswald
    4. December 2013 at 13:15

    Interest rate based inference is a cancer which corrupts everything it touches. I’m so glad I started reading you when I did, or I would still be infected.

  16. Gravatar of Mike Sax Mike Sax
    4. December 2013 at 17:46

    What SW says here: ” If the central bank targets the nominal interest rate at a low enough rate forever, you have to get deflation.”

    Sounds almost like what Scott has said in the past:

    “In fact, the tightest monetary policy imaginable would actually produce zero interest rates forever.”

    Is the crucial difference cause and effect? Whereas deflation and low interest rates go together SW thinks that ow interest rates give you the deflation rather than simply being a byproduct?

  17. Gravatar of SG SG
    5. December 2013 at 08:01

    Mike Sax:

    Bingo. Steve Williamson has unintentionally illustrated the great New Keynsian mistake of defining the stance of monetary policy by using an utterly ambiguous metric.

    The irony is that that Steve Williamson is getting all this attention because he *misunderstands* the issue so badly, whereas Scott and the other MMs are more or less ignored, despite having beaten the tight money ==> low interest rate drum for nearly 5 years now.

  18. Gravatar of ssumner ssumner
    5. December 2013 at 08:02

    Mike, Exactly.

  19. Gravatar of Scott Sumner, Monetary Autrocrat: You're not Entitled to Your Opinon' | Last Men and OverMen Scott Sumner, Monetary Autrocrat: You're not Entitled to Your Opinon' | Last Men and OverMen
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