Was monetary policy actually tight in the latter half of 2008? Scott Sumner has been arguing for some time that the answer is yes and has nicely summarized his views in this Vox Eu article. He gives a list of indicators to make his case, but leaves out what I think is the most damning evidence: the dramatic collapse in nominal spending at this time. A key premise behind his thinking is that monetary policy should stabilize nominal spending in order to ensure macroeconomic stability. Consequently, to the extent nominal spending dramatically decreases (increases) it must be the case that monetary policy is too tight (too loose). Below is a figure that documents this collapse in nominal spending--as measured by the annual growth in final sales to domestic purchasers--in the second half of 2008. The figure also documents some other well-known macroeconomic periods. I have taken the liberty to rename these periods using nominal spending labels (Click on the figure to enlarge.)
The article you reference in voxeu seems rather quaint didnt you think? Still couched in the framework of 1970s monetarism, looking at levels of interest rates and money supply. I thought we'd moved on...Taylor rules used to measure "tightness/looseness", and more sophisticated measures of liquidity such as developed by Tobias Adrian at the NY Fed...
ReplyDeleteHe may indeed be right that policy was "too tight" but I'd like to see some more up-to-date treatment.
ECB:
ReplyDeleteThe article actually criticizes those observers who look at the level of nominal interest rates and monetary quantities and draw conclusions on the stance of monetary policy. Moreover, the author, Scott Sumner, calls for the Fed to target the forecast which is an idea I would consider very "progressive" in macroeconomics.
Plus, the author is someone who is bringing more attention to nominal income targeting. We need more promoters like him.