Monetary stimulus is not aimed at consumption

A commenter recently asked:

The whole expectations idea strikes me as weak. What proportion of households are going to run out and buy consumer durables or book an extra holiday just because the Fed announces it will “do whatever it takes”? My guess is less than 5%.

The purpose of monetary stimulus is not to encourage consumption. Indeed if the stimulus is successful, then consumption as a share of GDP will generally decline (and the saving/investment share will rise.)

The purpose of monetary stimulus is to boost NGDP.  Full stop.

If nominal wages are sticky, and if we are not at full employment, then this rise in NGDP will also lead to more employment and more production of both consumer and investment goods.

But monetary stimulus is aimed at raising the product of M and V, not encouraging people to go shopping. After all, the funds for investment come from saving.

When there’s a big apple crop, then NGDP measured in apple terms will rise. But that’s not because a big apple crop causes lots of people to shop for a new washing machine. Rather it’s because it reduces the value of apples, which raises NGDP in apple terms.

Similarly, a big crop of money causes the value of money to fall, which raises NGDP in dollar terms. If nominal wages are sticky, that leads to more employment as a side effect. Getting people to go shopping has nothing to do with it.

The problem during a recession is not too much saving; it’s too much hoarding of base money. So the Fed needs to do things to either increase the supply (QE) or reduce the demand (forward guidance) for base money.

PS.  People often say that bad times lead to shorter life expectancy.  But is that true?

PPS.  The Chinese government recently confirmed my earlier claim that the death toll from coronavirus was underreported, just as in Western countries.

PPPS.  This FT story caught my eye:

“Maybe some other island nations can learn from New Zealand but it is probably too late for other countries to adopt the strategy at this stage,” said Prof Wilson.

In Australia, which has recorded fewer than 50 cases per day over the past few days, some experts have urged the government to adopt an elimination strategy.

But on Thursday, Scott Morrison, Australia’s prime minister, said the eradication approach taken by New Zealand would have entailed even greater economic restrictions.

“That is not seen to be in our view a wise trade-off in how we are managing the two crises that we are facing: the economic one and, of course, the health one,” Mr Morrison said.

The “suppression” path was best for Australia, he added. 

I predict that New Zealand’s plan will work, and I also predict that once it does work the Aussie government will be under strong pressure to copy New Zealand and go for zero.

PPPPS. Tyler Cowen recently linked to this news story:


Each year on April 17th, National Bat Appreciation Day reminds us of the roles bats play in our daily lives.

Yes, today we should all think about the role that bats are playing in our daily lives.

And then kill them all.

(Just kidding, animal lovers.)







30 Responses to “Monetary stimulus is not aimed at consumption”

  1. Gravatar of Market Fiscalist Market Fiscalist
    17. April 2020 at 13:38

    How do you increase the product of M and V without getting people to spend more when they shop (‘shop’ defined in the broadest terms)?

    Depending upon the elasticities involved its quite possible that a bumper apple crop really will get people to buy more washing machines. A bumper money crop will almost certainly get people buying more of almost everything, won’t it ?

  2. Gravatar of ssumner ssumner
    17. April 2020 at 14:22

    Market, You want more money to be spent, but it need not be spent on consumption. Perhaps people will put money in the bank, which will lend it out to finance investment.

  3. Gravatar of Rajat Rajat
    17. April 2020 at 14:45

    “The problem during a recession is not too much saving; it’s too much hoarding of base money.”

    I think most of us trained on the Keynesian model still find the intuition behind this difficult and could use a bit of help. Here are two questions for which your answers could be informative:

    1. What is the difference – from an individual’s perspective – between saving and hoarding? I get paid, but I choose not to spend it, so the money stays in the bank. Maybe no one wants to borrow that money at the bank’s prevailing lending rate, so the bank lowers its rate. While it waits for borrowers, the money is deposited at the central bank (if IOER is positive). To the extent the money remains on deposit at the central bank, does that constitute hoarding? So if IOER is zero, the only hoarding is in the form of currency held by the public? But if IOER is positive, the link between individuals’ unspent income (minus currency holdings) and investment breaks down because money hoarded can earn a higher return than money ‘saved’ and loaned out?

    2. What about in an open economy where domestic savings don’t need to equal domestic investment? Private savings can be used to purchase foreign (rather than local) assets and as demand for foreign exchange rises, the local currency falls. In this case, is the purchase of foreign assets a kind of hoarding or does it somehow finance other spending?

  4. Gravatar of ssumner ssumner
    17. April 2020 at 15:48

    Rajat, Base money can be hoarded by individuals or banks. If you save by putting the money in the bank, and the bank doesn’t lend it out or buy assets, but rather holds it as excess reserves, then the bank is hoarding base money. That’s just as contractionary as if an individual hoards base money. But again, the issue is hoarding of base money, not saving per se. Saving is not contractionary, although there may be flawed monetary regimes where an attempt to save more causes the central bank to adopt a more contractionary policy.

    Countries like Germany can save more than they invest, but the flip side of that is that they export more than they import. So an outflow of saving to foreign markets doesn’t reduce AD, indeed Keynesians often (wrongly) claim that trade surpluses boost AD.

  5. Gravatar of Thaomas Thaomas
    17. April 2020 at 16:07

    Well, if consumers were persuaded that Jerome would do what it takes to keep NGDP rising, which would mean a sharp rise in inflation compared to the last 10 years, they might a) feel less worried about reductions their incomes and b) think that it would be better to go shopping now rather than later when prices were higher. Now the reaction of investors might be even more pronounced, so, yes, consumption as a % of GDP might fall, but wouldn’t we expect both to rise?

    O course it is ironic speculation about how consumers and investors might react to the Fed actually carrying out its mandate when TIPS 5 and 10 year inflation expectations have fallen for the last four days.

    Why don’t we see MM drawing attention to this more often?

  6. Gravatar of Christian List Christian List
    17. April 2020 at 17:07

    I would have been in favor of eradicating all bats, they are probably worse than rats. There is supposedly no other animal that harbors so many pathogenic viruses on its body without getting sick from them itself. It’s a miracle.

    But it is said that they cannot be eradicated because they are important for pollinating plants. They are said to be more important than birds and insects, at least nature enthusiasts claim this. I don’t really believe that, but okay, no eradication of bats.

    It would probably be more than enough if we left the poor animals alone: don’t go to their caves, don’t touch them, don’t eat them, and don’t take them to CCP labs in Wuhan.


    I’ll take your New Zealand bet. I bet that Sweden will end up better than New Zealand in terms of negative consequences for the economy vs. negative consequences from the disease.

    New Zealand’s plan seems absurd right now. I can even give a few reasons for this conclusion:

    1. Death rates are now relatively well known, they are low.

    2. There might be some kind of background immunity after all. And children might not get sick at all. Once again, Benjamin Cole was right. This guy is unbelievable.

    3. There seem to be large reservoirs in many species. That makes eradication impossible. Does New Zealand want to kill all dogs, cats, horses, cattle, sheep, and bats?

    4. Ardern does not seem to be the brightest light in the bulb sky, not to say she is naive, overanxious, and incompetent.

  7. Gravatar of agrippa postumus agrippa postumus
    17. April 2020 at 17:34

    assuming sticky wages. hahahaha. malvolio, we need you more than ever. love, your ever faithful feste.

  8. Gravatar of Market Fiscalist Market Fiscalist
    17. April 2020 at 18:11

    ‘Perhaps people will put money in the bank, which will lend it out to finance investment.’

    Yes, some of the money will end up being spent on investment but for sure some will end up on consumption. Wouldn’t the outcome of optimal monetary policy be that the ratio of investment to consumption spending consistently reflects societal time preference (if that is not too Austrian a way of seeing it) no matter how V fluctuates ?

  9. Gravatar of Benoit Essiambre Benoit Essiambre
    17. April 2020 at 19:28

    This! I don’t understand why stimulus is always equated to boosting consumption. The savings->investment channel is also important. Y=C+I. How difficult is it to remember the second variable? There’s only two!

    The goal is to get people away from an inadequate Nash equilibrium of hoarding too much promises that reciprocally and circularly cancel out on the aggregate and instead get them more into physical investment and physical consumption that have actual physical value.

  10. Gravatar of Ray Lopez Ray Lopez
    17. April 2020 at 20:38

    Sumner (who once waged war on beavers, now he wants to kill all bats): “If nominal wages are sticky, and if we are not at full employment, then this rise in NGDP will also lead to more employment and more production of both consumer and investment goods.” — spot the absurdity of this, in an economy in lockdown?! As agrippa postumus says…

    @Christian List – now you’re with Ben Cole?! My your allegiance is fickle, like your allies Italy in WWII, not to mention every other country that bailed on Germ-any once their momentum faded. BTW, compare Sweden to Greece for C-19 cases, with similar sized populations. Sweden’s curve is going exponential, Greece’s is going to zero new C-19 cases.

  11. Gravatar of Brian Brian
    17. April 2020 at 21:32

    Regarding “background immunity” as mentioned by CL. On the USS Roosevelt only 13.5% were infected (650/4800). This is a great environment for mixing the air people breathe and yet natural defenses seemed to have worked for the majority. The infection rate was higher on the Diamond Princess but still only 19% (712/3711).

    The virus is everywhere. It would seem that for most sailors the mucous membrane did not allow a great reproduction of the virus so the swab picked up little. So masks and handwashing okay but how about just avoid feeling physically taxed. In other words, sleep, rest, avoid cold environments, avoid hot environments, eat foods that nourish the mucous membrane.

  12. Gravatar of Brian Brian
    17. April 2020 at 22:10

    Ray Lopez, you seem to be setting up an interesting comparison. If Sweden gets to herd immunity they can socialize with their at-risk sub-population but at their long-term care homes they may have to prohibit any visitors from outside of the country unless they are willing to quarantine just to visit the at-risk sub-population. If I recall correctly you posted that Greece is locked down. If Greece achieves elimination they can also socialize with the at-risk sub-population but their border checks will have to be maintained until the rest of the 7.8 billion person world has herd immunity or simply change the policy if the elimination strategy is failing.

    In the Swedish example there are many “borders” and each border is encircling a long-term care home or other at-risk group. In Greece there is a single long border through land, sea, and air. If the world does not achieve herd immunity soon then is it the many Swedish borders or the single Greek border that is more costly to maintain?

  13. Gravatar of Bb Bb
    18. April 2020 at 05:05

    Bats eat mosquitos

  14. Gravatar of Ralph Musgrave Ralph Musgrave
    18. April 2020 at 05:49

    I agree with Market Fiscalist above. I.e. if NGDP rises, then it’s very likely that private consumption spending will rise. Indeed if it doesn’t then the extra NGDP must take the form of extra investment spending or more public spending (ignoring exports and imports). And I don’t see that the purpose of stimulus is specifically to raise investment or public spending.

    If the effect of more NGDP is that employers (private and public) decide to invest more, then OK, but that should not be the SPECIFIC aim of stimulus. As to whether extra spending takes the form of more private or public spending, that’s up to the government of the day. A left of centre government would tend to go for more public spending, and a right wing government would not.

  15. Gravatar of rayward rayward
    18. April 2020 at 07:21

    We are experiencing a simultaneous collapse of supply and demand, something rare. Sumner’s focus on savings and investment is right in theory, but how theory applies to this situation is unclear. We have relied on investment for prosperity for decades, investment motivated by rising (financial) asset prices. That approach to prosperity will be tested by this health/economic crisis. My observation is that that approach to prosperity fuels both rising inequality and financial instability, the former causing the latter. But I won’t find any sympathy for my observation from Sumner. His eyes are focused on theory.

  16. Gravatar of rayward rayward
    18. April 2020 at 07:42

    The Fed has convinced investors that the Fed will do “whatever it takes” to support rising asset prices; and it will take more and more in the coming months. Today we can speculate on the difficulty of restarting the economy, but in the coming months we will know. Many small and medium sized businesses won’t be coming back, and neither will many employees who fear covid. And when the second wave strikes, and it will, the recriminations will destroy whatever common purpose that may have existed among the states Indeed, with different states implementing different policies, I foresee a collapse of cooperation among the states, the states maintaining restrictions imposing travel restrictions on residents from states that lifted the restrictions and experienced a spike in infections. I’m not allowing the cowboys from Texas come into my state with their covid 19. Trump thrives on chaos, and he is laying the foundation for chaos.

  17. Gravatar of ssumner ssumner
    18. April 2020 at 09:02

    Christian, I never said New Zealand’s plan was better than Sweden’s, just that it would “work” in reducing the caseload to zero.

    Market, Yes, but when coming out of recession the “preference” is typically for investment to grow faster than consumption.

    Ray, Your comment is even more idiotic than usual.

    Ralph, You said:

    “I agree with Market Fiscalist above. I.e. if NGDP rises, then it’s very likely that private consumption spending will rise.”

    Of course consumption will rise. What’s your point?

    Rayward, Obviously, this post is not about the current situation.

  18. Gravatar of Christian List Christian List
    18. April 2020 at 13:53

    just that it would “work” in reducing the caseload to zero.


    okay, but that’s not much of a prediction, considering how few cases New Zealand (and Australia for that matter) already have.

    The interesting question is whether New Zealand will end up doing better than Australia and Sweden in the long run, and I am sceptical about that.

    Maybe I am also negatively influenced because there were big reports in German media about how badly exchange students were suddenly treated in New Zealand by certain host families when corona broke out.

    These students were not sick, they did not even have contact, but they were treated as if they had the plague or leprosy, which was certainly partly due to the fact that Ardern issued these very strict rules and acted on television as if Ebola had broken out.

    Such strict measures can be taken when the hospitals threaten to overflow, or when Ebola really breaks out, but not in the current situation of New Zealand, with such few cases.

    And if Ardern wanted to eradicate the virus, she should have closed the borders earlier. Now the virus is in the country, now it is too late. I’m not saying it is impossible, who knows for sure, but the costs and risks seem disproportionately greater than the potential gain.

  19. Gravatar of agrippa postumus agrippa postumus
    18. April 2020 at 15:23

    nobody knows anything. but we can assume, can’t we??? like sticky wages? or an ax in a room with a locked door?

    I rather tell thee what is to be feared
    Than what I fear, for always I am Caesar.

    Indeed, Sir Sumner.

  20. Gravatar of Matthias Görgens Matthias Görgens
    18. April 2020 at 20:08

    Scott, I suspect the confusion might be between consumption falling as a share of GDP (what you said) vs consumption falling absolutely either in nominal or real terms (what commenters seemed to have understood?).

    I assume you meant that both consumption and investment will rise, but investment will rise faster?

    Agrippa Poatumus, if wages are perfectly flexible, monetary policy becomes much easier. Especially because erring on the tighter money side would no longer cause much unemployment. (There are still eg sticky nominal debts and other contracts, so monetary policy would still have some impact.)

    Not sure why you find sticky wages so weird? It’s a pretty standard assumption that’s well supported empirically.

  21. Gravatar of Spencer Hall Spencer Hall
    19. April 2020 at 07:35

    @Scott Sumner re: “Perhaps people will put money in the bank, which will lend it out to finance investment.”

    That’s decidedly contractionary. Banks don’t loan out existing deposits. Bank create deposits when they lend/invest. All bank held savings are un-used and un-spent, lost to both consumption and investment, indeed to any type of payment or expenditure.

    This is what makes economics the “dismal science” and not Irving Fisher’s “exact science”.

  22. Gravatar of Spencer Hall Spencer Hall
    19. April 2020 at 07:45

    Add the banking systems’ inputs, e.g., Reserve Bank credit, etc. They are all peripheral. Ergo, banks create deposits when they lend/invest.

    “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.

    “Profit or Loss From Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386,

  23. Gravatar of ssumner ssumner
    19. April 2020 at 08:51

    Matthias, Yes, investment generally rises faster during cyclical upswings.

  24. Gravatar of Matthias Goergens Matthias Goergens
    19. April 2020 at 19:17


    Yes, banks can create a loan/deposit pair out of thin air. For about a minute or so until the newly minted debtor goes out and spends their new funds as they are wont to do.

    If the debtor takes out cash, our bank loses reserves immediately. If the debtor write a check or sends a wire transfer, our bank will lose reserves when those are settled with the other bank involved.

    If our bank doesn’t want to enter cash-flow insolvency, they need depositors or wholesale funding etc to give them a stable base of reserves.

    Of course, I don’t think this will convince you. So a question instead: why do banks take deposits at all? Especially banks without minimum reserve requirements and otherwise light regulations. (Like the classic Scottish and Canadian banks.)

    George Selgin wrote about the whole topic as well, if memory serves right.

    As an aside, economics got the nickname the ‘dismal science’ from its opposition to slavery and racism. See eg

  25. Gravatar of Scott H Scott H
    20. April 2020 at 04:55

    Sumner: The Chinese are lying. The Chinese are telling the truth.
    News Story: The Chinese lied!
    Sumner: I called it.

  26. Gravatar of myb6 myb6
    20. April 2020 at 06:49

    Confirming: is the only (macro of course) difference between “savings” and “investment” that the former is in base money? If so, then don’t CB purchases convert the savings right back into investment &or consumption? If I’m getting that right, it’s just another illustration of “The problem during a recession is not too much saving; it’s too much hoarding of base money.”

    Can we generalize the effects past employment to [the real cost of satisfying prior contracts and assymetric consequences of increase v decrease] or are other, non-employment contracts just not nearly as important?

    I might fight on ancillary topics, but this blog is my money bible, forgive me for anything dumb above.

  27. Gravatar of myb6 myb6
    20. April 2020 at 06:58

    Ack, need to fix: is the difference between “savings” and “investment” (S-I) equal to base money saving? If so, then don’t CB purchases convert such base-money savings right back into investment &or consumption?

  28. Gravatar of myb6 myb6
    20. April 2020 at 11:30

    Never mind, been far too long since macro classes, the above is totally confused b/c I was misremembering the definitions used for macro accounting identities (totally different than the firm/household definitions I need to use in real life).

    In case anyone else had the same confusion, macro “I” is physical, total S= total I, “private saving” includes lots of things that your financial advisor would normally call “investment”.

  29. Gravatar of ssumner ssumner
    20. April 2020 at 16:03

    Scott, That would be cute if I had argued that the Chinese government told the truth. But I didn’t. I said the actual rates of mortality were somewhat higher than reported.

  30. Gravatar of MPCs, multipliers, and our 1st year ECON model – TVHE MPCs, multipliers, and our 1st year ECON model – TVHE
    11. May 2020 at 18:58

    […] like always it is not the full truth – and it is why Scott Sumner says monetary policy is not aimed at consumption.  And it is why the other identity PY = MV also […]

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