Knowing and Making

Thank goodness we have economics blogs to explain Ben Bernanke to us. On Wednesday, I read at Scott Sumner's blog that: ...there are lots of simple answers (massive QE...etc.) But...for some reason our monetary authorities don’t see it this way. They view all these ideas as exceedingly risky.... Scott is outraged that the Fed refuses to do more monetary stimulus to reduce unemployment because they are worried about inflation. But it seems that other people live in a different world. On Thursday, I read at FT Alphaville that: The current wisdom appears to be that more quantitative easing (QE) would be a good thing...Bernanke only has one playbook, which he has so far followed almost religiously. The final solution in that playbook involves helicopters and money. So, no, he will not stop printing - it's the only idea he possesses. Alphaville is concerned that the Fed is increasing monetary stimulus to reduce unemployment, and thinks they should worry about inflation. ...

Nick Rowe has come up recently with a couple of nice analogies for monetary policy: the pole balancer and the farmboy . And for those of you not reading the other economics blogs, there's a bit of an uproar right now about Narayana Kocherlakota, president of the Minnesota Federal Reserve, and his claim that long-term  low  interest rates will lead to deflation , when surely every schoolboy knows low rates lead to inflation . I've been trying to work out why Kocherlakota's argument is so intuitively wrong and yet theoretically consistent with standard monetary models. I think I've got it, with a bit of inspiration from Nick, Karl Smith , Andy Harless and Scott Sumner . So here's my contribution to the monetary analogy industry: You're driving a truck, one of those big articulated lorries with a trailer full of goods and services. There are three main variables which determine the truck's acceleration: how much you push the gas pedal (let's call...

I have posted a couple of detailed comments in response to Scott Sumner's recent items, and as most of my readers probably don't read his blog, I'm cross-posting them here. For background, read this comparison of the performance of the UK and Sweden , and the comment thread; then the following response by Scott . First, I tackle UK monetary policy: As illustrated by the currency discussion, the figures in this debate is strongly influenced by the choice of starting point. For example, nominal GDP in the UK has been growing at an annual rate of 6% for the last nine months. http://www.telegraph.co.uk/finance/economics/7764916/Boost-for-UK-as-GDP-growth-revised-up.html All of the problems in Scott's figures come from a single quarter, Q1 2009. In Q1 of 2009 we were still in recession, with a 3% fall in NGDP in that quarter alone. I believe the CPI was also negative in that quarter (though I can't find quarterly index figures for that, only annual changes). It was ...

In the leader column of City AM today, Allister Heath argues that quantitative easing should be stopped because it will lead to inflation. Set aside for a moment the fact that this is the whole point of it. Is he right that it will actually succeed in causing inflation? Scott Sumner (consistent with mainstream monetary theory) points out that an increase in the money supply is only inflationary if it is expected to be permanent. And is QE a permanent increase? Not necessarily. On the contrary: QE in isolation makes the money supply smaller . Under QE, the Bank of England has issued £200 billion of new currency and used it to buy bonds (mostly gilts) in the private market. (The Federal Reserve has done something similar, with a higher proportion of corporate and mortgage-backed bonds.) So there's now £200 billion more sterling than there used to be - it's fair to say the money supply is bigger. What will happen next year - or in five years time, or thirty years when all the ...

I've had this article in draft for about three weeks. Paul Krugman's latest item seemed an opportune moment to finish it. Intriguing article by Sheng and Pomerleano in the Economists' Forum about zero interest rate policy . I don't think I agree with what they are saying (insofar as I can even tell what they're saying) but it stimulates a few thoughts along Scott Sumnerish lines. One bit (from Kevin Warsh, quoted approvingly by the authors) jumped out at me: A complication is the large volume of banking system reserves created by the non-traditional policy responses. There is a risk, of much debated magnitude, that the unusually high level of reserves, along with substantial liquid assets of the banking system, could fuel an unanticipated, excessive surge in lending. Now surely a surge in lending is exactly what we want? Isn't all this monetary activism meant to increase the effective money supply (or counter a fall in velocity) therefore sustaining nominal GD...

Roger Farmer likes unorthodox monetary policy. At the turn of the year he proposed that central banks should buy and sell equities , targeting a stock price index as a method of controlling asset prices. My own version of this proposal was slightly different . Now he's suggesting that they use quantitative easing as a monetary tool , independently of interest rates. The idea is that even once central banks have started to raise interest rates to control inflation, they should separately adjust their balance sheet, changing the composition of the stock of savings in the economy, to combat unemployment. If QE is a useful tool now to help raise economic output, why shouldn't it be useful later, when inflation is taking off? Now admittedly I'm not a trained monetary economist, but I have a bad feeling about this idea. Aren't interest rate targets and QE both different manifestations of the central bank's ability to control the money supply? Crudely speaking: if money is...

An chain of favourites is emerging in recent blogs. Let me show you how it works. Chuprevich 's favourite economist is Tyler Cowen (he is a few other people 's favourite too). It follows of course that his favourite monetary economist is also Tyler Cowen*. Tyler Cowen 's favourite monetary economist is Scott Sumner. Scott Sumner 's favourite monetary economist is Bennett McCallum. Bennett McCallum's favourite monetary economist is not currently known. Can this chain of favourite monetary economists be extended in either direction? Perhaps Professor McCallum will leave a comment to assist. If anyone's favourite monetary economist is Chuprevich, do let us know. I am having trouble investigating that as his website makes me dizzy, not to mention the fact that Chuprevich may not be a real person. Can we develop a theory of favouritism among monetary economists? This Google search shows a few more favourites (note the American spelling) and a fair inference is th...

If you have clicked onto this article just from reading the title, then I may disappoint you slightly. I am not (yet) going to propound a behavioural theory of money, though I think there's one coming in the future. But I will point to a couple of results which may indicate where to get one. The first is a quote from John Moore and Nobu Kiyotaki of LSE, in the beautifully titled lecture Evil Is The Root Of All Money . "Money is the medium of exchange. Notice that for this argument to hold together, there has to be a set of mutually-sustaining beliefs, stretching off to infinity. I was willing to hold money yesterday because I believed the dentist would accept it today. She is willing to hold money today because she believes someone else will accept it tomorrow. And so on. If there were a known end-point to history, the entire structure of beliefs would collapse back from the end." This, as they point out, is the conventional view among microeconomists about the existence ...