The “stance” of monetary policy

When I present my talk on the 2008 recession there are always questions about my claim that money was tight in 2008.  Smarter questioners will often say it doesn’t matter whether you call it loose or tight.  It’s just semantics.  I sympathize with this view, but I think it’s wrong.  If monetary policy was widely seen as being highly contractionary in late 2008, the recession would have been far milder.  That’s because people would have demanded an easier monetary policy.  As a counterfactual, imagine the same degree of tightness achieved with an 8% nominal interest rate.  Don’t you think that when unemployment soared to 10% there would have been a chorus of demands that rates be cut?  Everyone would agree that money was tight if we had 8% nominal rates and deflation in early 2009.  So words do matter.

Here’s Ryan Avent:

So why is tapering being discussed at all? A good question. Some of those in favour of tapering are of the view that the size of the Fed’s balance sheet, rather than the pace at which it is growing, is the right gauge of the stance of monetary policy (at least where QE is concerned).

OK, a question is being raised.  Which is the better way of characterizing the stance of monetary policy. Let’s think about this logically . . .

.  .  .

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Um, what exactly does ‘stance’ mean?  Further down I put the definition of ‘stance’ that I found on the internet. But that definition isn’t really helpful.  So what does ‘stance’ mean?  I don’t doubt that somewhere you can find a definition where it refers to the level of interest rates.  But there are two problems with that definition:

1.  It’s wrong; no one except Joan Robinson thinks high rates during hyperinflation represent tight money.

2.  It’s not really a definition of ‘stance,’ it’s an example of how the term might be applied to the level of interest rates.  But it doesn’t tell us what ‘stance’ actually MEANS.  Why are high interest rates viewed as tight money? And hence it’s not helpful in figuring out how to characterize a non-interest rate-oriented monetary policy like QE.  Is it the level, or the rate of change in bond holdings that matter?  We can’t answer that question without knowing what ‘stance’ means.  And there is no definition that makes any sense.

Actually there is one definition that is logical, Ben Bernanke’s definition:

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.

But since Ben Bernanke and I are the only two people in the world who believe that this is the “right” definition (i.e. most sensible), it’s not very helpful in communication.  Make that one, Bernanke has stopped believing this.

For the rest of the population, it makes about as much sense to argue whether the level or change in bond holdings best measures the phluggeratiousness of monetary policy as it does to argue which best measures the stance of monetary policy.  Of course everyone except Steve Williamson agrees that doing more QE is as expansionary or more expansionary than not doing more QE.  But the absolute stance?  First we’d have to come up with a definition of ‘stance.’

Here’s stance defined on the internet:

  1. the way in which someone stands, esp. when deliberately adopted (as in baseball, golf, and other sports); a person’s posture.
    “she altered her stance, resting all her weight on one leg”
    synonyms: posture, body position, poseattitude More

  2. 2.
    a ledge or foothold on which a belay can be secured.


If you google the phrase: “stance of monetary policy definition,” the first item is from a Federal Reserve publication:

There is no clear consensus about the appropriate definition of a “neutral interest rate” to be used to evaluate whether monetary policy is “easy” or “tight.”

Yikes, that’s not very helpful.

[Update:  Rajat pointed out that Google searches are tailored to the browsing habits of the searcher.  So please ignore the rest of this embarrassing post.]

So let’s go to the second item:

When I started blogging I kept claiming that the steep recession of 2008-09 was caused by ultra-tight Fed policy.  I had the distinct impression that almost no one agreed with me. Even some who favored NGDPLT preferred to call the mistakes “errors of omission,” not tight money causing a recession.

Oh wait, that’s from TheMoneyIllusion.  The one that contains the Bernanke quotation.  I’m using Google to try to find out what a word means, and it brings up my own rambling blog post.

Moving on we have Investopia’s definition in the 3rd and 4th spot:

When a central bank (such as the Federal Reserve) attempts to expand the overall money supply to boost the economy when growth is slowing (as measured by GDP). This is done to encourage more spending from consumers and businesses by making money less expensive to borrow by lowering the interest rate. Furthermore, the Federal Reserve also has the authority to purchase Treasuries on the open market to infuse capital into a weakening economy.

Also known as an “easy monetary policy”.

At least it’s a definition.  But “attempts?”  The Fed cut rates in 1930 in an “attempt” to boost the economy. Was that easy money?  Not according to the most respected book on monetary history ever written.

Number 5 is some EU article.  Number 6 is something I wrote for Cato Unbound.  Number 7 is a David Beckworth post.

So 40% of the top 7 items dredged up by Google are written by market monetarists.  I guess that makes us the experts.



17 Responses to “The “stance” of monetary policy”

  1. Gravatar of Geoff Geoff
    17. December 2013 at 23:22

    “That’s because people would have demanded an easier monetary policy.”

    You can’t know this in a central banking world. The only, and I mean the only, source of information that can enable individuals in a division of labor to know such a thing, is through the messy, trial and error, world of prices, which of course presupposes private property and precludes central banking.

    Sumner, you are deluding yourself by believing that you have the intellectual wherewithal to know what the right quantity of aggregate spending should be, and, as an implication, what the correct quantity of money should be (since spending occurs on the basis of money balances).

    Only by observing individuals in a free market can you know if they have too many or too little shirts, cars, and that which is used as a medium of exchanging shirts and cars.

    My best guess for why the word “market” is being haphazardly thrown next to “monetarism” is to mislead people partial to free markets to support it. Market monetarism? Markets are good! That means market monetarism is good! The argument that because “the market decides” how much money the Fed will print given an NGDP counterfeiting target, that this implies justification in calling it “market monetarism”, means that all monetarism is “market monetarism.” Under price targeting, “the market decides” how much money printing there will be. Same thing for every counterfeiting “rule”.

    Of course here, according to NGDPLT advocates, the market can be “wrong” in how much money should be created. For it is possible that under 2% price targeting, the “market” will fail to “demand” enough additional money to keep NGDP growing the way “market monetarists” personally want. Here, the market failed to demand enough additional money and thus spending. But of course, it isn’t communicated as a market failure, it’s communicated as a central bank failure.

    Hilarious stuff.

  2. Gravatar of Ralph Musgrave Ralph Musgrave
    17. December 2013 at 23:58

    I always enjoy seeing advocates of monetary policy tying themselves up in knots on this site. Given a recession why not just what Keynes and MMTers advocate: 1, create new money, 2, spend it into the economy (and/or cut taxes), 3, as long as the amount created and spent is right, then its “problem solved”.

    As to what effect that has on interest rates, I couldn’t care less. Interest rates should be left to find their own free market level, just like the price of iron ore.

  3. Gravatar of Benjamin Cole Benjamin Cole
    18. December 2013 at 00:11

    Excellent blogging.

    Well, Scott Sumner, I agree with your definition of the monetary “stance.”

    “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.”

    So there are two of us in the world. Bernanke has been “Federized.”

    For while I wrote letters and e-mails to pundits, bloggers, economists, etc., correcting stories they had written that the Fed has an “ultra-easy” or “‘hyper-accommodative” monetary policy, and those descriptions you can read every day in the media. But it was like fighting the tide with a water hose.

    So, for five years the Fed has had a “Grand Canyon-loose-and-easy accommodative” policy—but inflation now at 0.7 percent on the PCE deflator?

    How do we define Volcker’s reign, when he left the Fed with 4 percent or 5 percent inflation?

  4. Gravatar of Rajat Rajat
    18. December 2013 at 02:30

    Scott, don’t you know Google tailors its search results based on your browsing history! We need some non-economists to enter the same search.

  5. Gravatar of Philip George Philip George
    18. December 2013 at 03:38

    You are absolutely right in saying that interest rates in themselves are no indication of the scarcity of money. For that you need an absolute gauge of money. And a good judge of a monetary indicator is that it should have contracted in 2008. Take a look at

    To derive this measure I just add M1 and sweeps and deduct a 12-month stock of personal savings. Why deduct personal saving? Because money is a medium of exchange and saving, by definition, is not a medium of exchange.

    Unfortunately, the July 2013 “comprehensive revision” by the BEA commits an error in calculating personal saving. See for details. But even with the new figures the contraction of money in 2008 is apparent. Actually, it began much earlier, in 2006.

  6. Gravatar of Robert Simmons Robert Simmons
    18. December 2013 at 04:58

    Semantics is like monetary policy. In the long-run we adjust to them so they’re more-or-less neutral, in the short-run they can have bad consequences. So let’s pick a monetary policy and semantics that are likely to work the best. [Also, I agree with your definition of stance, so that’s two].

  7. Gravatar of ssumner ssumner
    18. December 2013 at 05:41

    Ralph, I agree with most of what you say, except:

    1. What matters is NGDP not RGDP. You don’t print money if the recession has 20% inflation.

    2. As long as the thing you buy is safe assets.

    Ben, I exaggerated a little bit when I said it was just me.

    Rajat, Well that’s a pretty embarrassing fact! No I didn’t know.

    Philip, I agree you can come up with aggregates that correlate with the economy, but I still don’t think they are useful.

    Robert, Sounds good.

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. December 2013 at 06:34

    For what it’s worth, I repeated the same Google search as you and your post came in at 4th, your Cato article at 5th and David Beckworth’s article at 7th.

    The fact that Google tailors its searches to its users certainly has its drawbacks, but it makes it more useful when one’s memory needs a nudge. Google changed its algorithm in the last couple of years to focus on recent items, and I find that to be very frustrating as it brings up much more ephemera.

  9. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. December 2013 at 06:49

    “The fact that Google tailors its searches to its users certainly has its drawbacks…”

    Such as institutionalizing confirmation bias (as if it were not previously institutionalized enough).

  10. Gravatar of Brian Donohue Brian Donohue
    18. December 2013 at 07:10

    AFAICT, the markets are braced for a $10 billion or so taper.

    I’m drinking your kool-aid, but this business of buying 80-90% of new debt every month, it feels like something we should try to be baby-stepping away from as the economy finds its feet.

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. December 2013 at 07:15

    Off Topic.

    If you decide to address the Krugman post on Nicholas Crafts you may want to tack on something about the following.

    I came across the following post by Philip Pilkington at Naked Capitalism:

    “…It was not a terribly complex plan. The military contractors were paid in bills of exchange issued by a shell company. These contractors would then take the bills to a private German bank which would then gladly turn over cash to the holder because they knew that they could then hand the Mefo bill to the Reichsbank which would in turn convert it into cash using their money-issuing powers.

    The resulting spending resulted in the German economic boom that took place under Hitler. Here is a nice graph from Erwin Mahe that compares the growth and inflation in Nazi Germany to that in the Netherlands in those dark years:


    This is an incredible story from an economic point-of-view. After Hitler’s election in 1933 the Nazis were able to sustain between about 8-10% GDP for five years running with an inflation rate that would be the envy of the Bank of England and other inflation-targeters today. Now, we know how this growth was financed “” that is, by money issuance “” but how was it achieved? Here we turn back to the Nuremberg transcripts…”

    Note that he credits fiscal policy (MEFO bills) with Germany’s recovery from the Great Depression and he supports his case by using a graph taken from a post authored by Erwan Mahe:

    It’s hard to find a nice quote that summarizes Mahe’s post but the main point was to contrast German *monetary* policy during the 1930s with ECB policy today. In short, Pilkington’s treatment of the graph he borrowed from Mahe is oddly reminiscent to Krugman’s treatment of the graph he borrowed from Crafts.

    And as long as we’re on the subject of Hjalmar Schacht’s New Plan and its role in the German recovery from the Great Depression let me add the following.

    Currency controls were imposed in July 1931, effectively taking Germany off the gold standard a full 18 months before Hitler became Chancellor. This freed the Reichsbank to pursue expansionary monetary policy, which according to Peter Temin, it had started by at least the summer of 1932. According to the League of Nations Statistical Yearbook, Germany’s industrial production reached bottom in August 1932 and had already increased 6.8% by January 1933, the month Hitler entered office.

    By April 1934, when Germany issued its first MEFO bill, and started running its first “large” deficit (about 5.4% of GDP in FY 1934 according Albrecht Ritschl, counting the “shadow” budget), industrial production was already 45.8% above the level it had been in August 1932. Hjamar Schacht only became the Economic Minister in addition to being the Reichsbank President in August 1934. Thus by the time he presented his “New Plan” the following month, the economic recovery was already well underway.

    According to Robert Hetzel unemployment averaged 13.8% for all of 1934, already down sharply from the 28.1% rate it averaged in 1932. As Barry Eichengreen and others have implied, Nazi Germany’s introduction of expansionary fiscal policy in 1934 proved to be rather anticlimactic.

    And what about the Netherlands? The order of economic recovery from the Great Depression followed in the exact order that countries devalued their currencies or detached from the gold standard. The Netherlands was part of the “gold bloc” of countries (i.e. France, Italy, Poland and Switzerland) that devalued late in October 1936.

  12. Gravatar of 123 123
    18. December 2013 at 07:25

    When googling in Europe, ECB is the first link:

    “Good decisions rely on comprehensive information, sound analysis and good judgement. Central banks’ decisions rely on an assessment of their monetary policy stance. That stance can
    be defined as the contribution made by monetary policy to economic, financial and monetary developments. Thus, the assessment of the monetary policy stance can be defined as
    determining whether the contribution made by monetary policy actions is appropriate in view of the central bank’s objectives. It is on the basis of its assessment of the monetary policy stance that a central bank calibrates its actions. “

  13. Gravatar of Lorenzo from Oz Lorenzo from Oz
    18. December 2013 at 07:54

    Googling in Australia, the RBA is the first two links, “news for” is number 3, the SF Fed is number 4, a NSW school primer is number 5, this post is number 6.

    The April 2005 SF Fed document quotes one Janet Yellen:

  14. Gravatar of Ralph Musgrave Ralph Musgrave
    18. December 2013 at 08:38


    Why your “as long as you buy safe assets” proviso? I suggest feeding new monetary base into the private sector via tax cuts and/or more public spending, and for the following reasons.

    Given say 2% inflation, the real value of the national debt and monetary base will shrink at 2%pa. And they cannot shrink for ever, so they’ll need topping up, and that can only be done by the above “feeding”.

    Plus if real growth is say 2%pa then that means even more feeding. In fact (plucking more numbers out of thin air) if the debt and base are 50% of GDP and are to stay at that ratio, then according to my unreliable calculations, the total feed or deficit needs to be 2% of GDP a year.

    If all the feeding is done by buying safe assets, then eventually the private sector would sell all its assets to the state.

    Next, come a recession, a larger deficit is needed. The advantage of buying safe assets is that they can be sold back. On the other hand reversing tax cuts isn’t difficult: the UK reversed the VAT cut it made early in the recession. And the basic purpose of the economy is to produce what households want, not to invest when it’s far from 100% clear that the economy is short of investment. E.g. plant utilisation in the US is currently at a record 30 year low.

  15. Gravatar of TravisV TravisV
    18. December 2013 at 08:46

    Prof. Sumner,

    You’ll enjoy this new post by Yglesias:

    “In general it seems very important to freshwater types to contend that their saltwater antagonists aren’t just mistaken or even stupid but actually fraudulent in their views (see Robert Lucas on “schlock economics” or John Cochrane saying Robert Shiller is trying to take the science out of economics) so this view of saltwater macro as politically motivated cheap talk is appealing. But it doesn’t make any sense. If you knew””really knew””how changes in federal budget policy or changes in the extent of Federal Reserve Quantitative Easing programs would impact the economy you could make a lot of money with that knowledge. And for precisely that reason, investment banks do in fact do macroeconomic analysis. And specifically they do broadly Keynesian types of analysis even though it would be easy to hire people who have a different approach.”

  16. Gravatar of ssumner ssumner
    18. December 2013 at 14:00

    Everyone, Thanks for all the google info.

    Mark, There’s lots to think about there. Obviously I’m running behind right now. But excellent research!

    Ralph, You said;

    “If all the feeding is done by buying safe assets, then eventually the private sector would sell all its assets to the state.”

    I’m assuming they will run enough deficits to keep the national debt far larger than the base. If not, then I’m open to buying other assets (as in Norway, Singapore, etc.)

    Travis, Lucas was wrong about Romer, but that’s not really fair. Lucas is generally much more polite that Krugman or DeLong. The freshwater school has many faults, rudeness is far down the list. After all, Romer was in the position of being a government official, who pretty much had to toe the line. Now in this case Lucas was wrong as Romer did believe what she said, but it’s an easy mistake for Lucas to make, as there are many examples of economic advisors being forced to take awkward positions. Didn’t Shiller recently call Fama “crazy” or something similar?

  17. Gravatar of Erik Erik
    22. December 2013 at 00:27

    Here is the Economist on the “stance” of monetary policy:

    “Moreover, even this lacklustre performance is underpinned by central banks’ extremely loose monetary policy. The Federal Reserve and the Bank of Japan have continued to print money on a huge scale to purchase bonds, in the hope of driving down long-term interest rates, while keeping short-term ones close to zero (chart 8).”

    Your post is very interesting Scott! I think it would be very good if moe people would understand that the stance of monetary policy is not a entirely simplistic issue. I that would be good regardless of whether people agree with MM or not.

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