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Here’s Simon Wren-Lewis:

I’m interested in this asymmetry, and where it comes from. Why do MM hate fiscal expansion at the ZLB so much? It could be ideological (see Noah Smith here), but I suspect something else matters. I think it has something to do with monetarism, by which I mean a belief that money is at the heart of issues to do with stabilisation and inflation. MM is not about controlling the money supply as monetarism originally was, but I think many other aspects of monetarism survive. My own view is more Wicksellian (or perhaps Woodfordian), whence the failure to be able to lower interest rates below zero naturally appears central. To those not trained as macroeconomists (and perhaps some that are) these sentences will appear mysterious, so if this idea survives comments I may come back to it later.

A few quick reactions:

1. I seem to recall that some market monetarists think fiscal stimulus is worth a shot.

2. I’ve argued that some types of fiscal stimulus can survive monetary offset. For instance, if the central bank is targeting inflation then an employer-side payroll tax cut can work, by boosting aggregate supply. Christina Romer has made the same argument, although I’m not sure uses the aggregate supply shift framework. A cut in VAT rates can also help, if the central bank is targeting prices inclusive of indirect taxes.

I don’t think my views on these issues can in any way be described as ideological. I actually think VATs and payroll taxes are our most efficient taxes, and instead tend to oppose high personal income tax rates. And recall that fiscal stimulus can involve either lower taxes or higher spending, so it doesn’t fit neatly into a left/right debate over the size of government.

I think Wren-Lewis has a better argument when he points to the fact that MMs often oppose fiscal stimulus at zero rates. I could write a whole dissertation on this issue (and arguably have in this blog) but here are a few points that come to mind:

1. Monetary offset is highly counterintuitive. It’s like the face/vase picture, where something can be easily seen from one perspective, and yet look invisible from another. Here are a few examples:

a. In this post I discuss a few comments by Tim Duy, a respected centrist Keynesian, which perfectly describe monetary offset. Yet I am almost certain that Tim Duy doesn’t agree with my views on monetary offset (i.e. I doubt he agrees that fiscal multipliers are still zero at the zero bound.) He sees what I see, but (presumably) interprets what he sees very differently.

b. Paul Krugman said 2013 was going to be a “test” of the MM claim of monetary offset. When we passed that test with flying colors (as growth accelerated), he ridiculed the idea that there had ever been a test. Perhaps that’s because he’s so sure the idea is wrong that he assumed any test that seemed to show otherwise must be wrong. Indeed in the case of the UK he complained about austerity, and then when GDP started accelerating unexpectedly, said something to the effect that on second thought there hadn’t been much austerity in 2012. Then why not tell us that in 2012? And suppose MM had failed the 2013 Krugman test? Does anyone think he would have said “in fairness to the MMs, it wasn’t a fair test, because other things might have changed?”

c. Many Keynesians accept that monetary offset applies at positive interest rates, but insist it doesn’t apply at zero rates. But these same Keynesians often insist that fiscal austerity in the eurozone caused the recession of 2011-13, even though their own model says that interpretation makes no sense when rates are not at zero, and rates were not at zero when the eurozone went into the double dip recession. The only response I’ve ever heard is that the liquidity trap model also applies to very low but positive interest rates. Even if that were true, it would not be relevant for a case where the monetary authority is actually “pulling on the string” by raising its target rates, as in 2011. That showed clear intent to restrain AD growth. And yet I’ve never once heard a Keynesian refute this point. So how can we take seriously the austerity claims that were being made in 2011? If there is a model where austerity reduces NGDP growth during a period where the central bank is raising rates to restrain inflation, I’d love to see the model. But as far as I know no Keynesian has even produced a defense of this claim. Just silence.

2. I also have an ulterior motive. I think stabilization policy would be much more effective if everyone agreed with Ben Bernanke that the Fed never runs out of ammunition, that they can always do “more.” Obviously this perception was not widely held, and hence the public put very little pressure on the Fed to boost AD in 2008-09. I would go even further, I believe Bernanke would have welcomed more pressure on the Fed to stimulate the economy in 2008-09. Insiders insist that the Fed was frustrated because 90% of what they heard was criticism from “inflation nutters.” Krugman defenders will (correctly) point to the fact that Krugman asked the Fed to do more. But I’ve spoken with highly intelligent economists around 2008-09, who read Krugman’s column frequently and very much like Krugman, who were shocked when I told them Krugman thought the Fed could do more. They said the impression they got was that Krugman thought we were in a liquidity trap, and could do no more. That we needed fiscal stimulus. His actual (nuanced) message got lost. Maybe the “pro-stimulus” side of the inflation debate needed more single-minded fanatics like me that sent a clear message–the Fed and BoE are steering the nominal economy, and if you don’t think there is enough AD then blame them for not doing more. Instead the central banks were mostly blamed for doing too much.

This anonymous comment at the end of the Wren-Lewis post is a perfect example of how many Keynesians fail to grasp the implication of the ECB’s 2011 policy. He/she confuses a situation where rates are low and even lower rates wouldn’t help (a good argument), and the very different case where rates are actually being raised (a bad argument). If they are being raised then there is a presumption of 100% monetary offset. I’m not sure why this idea is so hard to grasp.

W. Peden and Nick Rowe have some good comments after the Wren-Lewis post.

Mark Sadowski also replies to Wren-Lewis.

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This entry was posted on June 11th, 2014 and is filed under Monetary Policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



