A decade later3rd February 2019
I began this blog 10 years ago today, although my crusade to change monetary policy first began in the fall of 2008. In my first blog post I laid out my goals:
A blog is not the place for a lengthy dissertation, and so here I’ll merely list three views that underlie my unusual take on the current recession:
Premise 1: The only coherent way of characterizing monetary policy as being either too”easy” or “tight” is relative to the policy stance expected to achieve the central bank’s goals.
Premise 2: “Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.”
Premise 3: After mid-2008, and especially in early October, the expected growth in the price level and nominal GDP fell increasingly far below the Fed’s implicit target.
In plain English, the first premise means the Fed should adopt the policy stance most likely to achieve its goals. It is a point forcefully advocated by Lars Svensson, who Paul Krugman recently cited as an expert on the role of expectations in monetary policy. The second is a quotation from Mishkin’s best selling monetary economics text (p. 607), i.e. it’s what we have been teaching our students. And I have encountered few if any economists who disagree with my third assumption. Indeed, if this were not so, why would Bernanke be calling for fiscal expansion?
The logical implication of these three premises is that the Fed has the ability to boost nominal growth expectations, and if they let those expectations fall far below target (as they did last fall) the subsequent recession (depression?) is their fault. Why does almost no one else see things that way? That’s what I’d like to explore.
So where do we stand today? To me, it looks like one of those glass half full/half empty situations. I see lots of good things and lots of room for further progress. Let’s start with the good—changes that are in line with what I was discussing in early 2009:
1. After a steep recession in 2008 and early 2009, the growth rate of nominal GDP has been reasonably steady over the past 9.5 years. I expect this to continue.
2. There is greatly increased interest in NGDP targeting, as well as level targeting.
3. There is a greater awareness of the fact that the Fed is not out of “ammunition” once rates hit zero.
4. There is greater awareness of how asset prices provide useful information on the stance of monetary policy.
5. There is greater awareness of the importance of not reasoning from a price change.
6. There is greater awareness that monetary offset must be considered when thinking about economic shocks.
7. There is greater awareness that money was too tight in 2008.
8. There is greater awareness that the Fed should not have begun paying positive IOR in October 2008.
9. There is greater awareness that central banks can pay negative interest on bank reserves.
10. There is greater awareness of the importance of forward guidance.
Now let’s think about where we’ve fallen short:
1. NGDP growth was far too low during the years after 2009.
2. The Fed has not formally adopted NGDP targeting and/or level targeting.
3. We still don’t have a highly liquid NGDP futures markets (such as my “guardrails” proposal.
4. The profession still has not embraced the belief that tight money caused the big drop in NGDP during 2008-09.
5. There is still too much of a tendency to equate low rates and/or QE with easy money.
6. There is still too much faith in fiscal policy, too little awareness of monetary offset.
7. The forward guidance we do have is not as “data dependent” as it should be.
This is my 3882nd post and I’ve read almost all of the 160,270 comments. I don’t know how many total hits (WordPress is now so complicated I can’t really use it effectively.) But I’d guess close to 10 million hits, as I’ve averaged several thousand per day (trending lower over time.) The biggest day I recall was about 39,000 hits. Probably 10,000 unneeded commas.
All good times must end and the golden age of economics blogging is certainly over. But I’ll keep going. The next three years will be more interesting than the past three years because something unusual will definitely happen to the macro economy. Either our first successful soft landing (my guess), high inflation, or recession.
Thanks for your support.
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