Neil Irwin of the Washington Post wrote just last week about how the Swedish economy is doing so much better that the U.S. economy and attributed part of that success to a more aggressive monetary policy there. Here is Irwin:
The Federal Reserve has won both plaudits and criticism for responding aggressively to the financial crisis, pumping money into the financial system in epic fashion. But by one key measure, the Swedish central bank was even more aggressive.
Like the Fed, the Riksbank lowered its target short-term interest rate nearly to zero. But it also expanded the size of its balance sheet more than the Fed did relative to the size of its economy, flooding the financial system with even more cash during the height of the crisis.
In summer 2009, the Riksbank had assets on its balance sheet equivalent to more than 25 percent of the nation’s gross domestic product. For the Fed, that level never got much over 15 percent.
So here Irwin is implying the Fed has not been aggressive enough. As I showed in my previous post, this implications is borne out by the different paths of nominal GDP in the two countries. But now Irwin comes out with an article on the legacy of QE2 and concludes that it shows that U.S. monetary policy really is limited in what it can do to revive the economy:
As it [i.e. QE2] ends, it shows more than anything the limits of the power of monetary policy to correct what ails the U.S. economy.
This is confusing. Is the Fed truly capable of doing more but just not trying hard enough as suggested by the first article or is monetary policy truly limited as argued in the second piece? The answer is clear when one considers that (1) QE worked wonders before when it was properly implemented in 1933-1936, (2) the demand for money and money-like assets remains elevated and this is something the Fed could reverse through the proper management of nominal expectations, (3) the Fed has shown no desire to do level targeting which would require higher-than-normal catch-up growth in nominal spending and prices. I wish Irwin and other prominent Fed journalists would change the conversation from the defeatist mantra that the Fed is limited to one where the true possibilities of monetary policy are explored.
This kind of contradiction is common even among academic economists. If you ask a macroeconomist why the fed let monetary policy become too tight in the Fall of 2008 they will often reply, "What more could they have done?" to which I reply "Lower the Fed Funds rate to zero sooner, buy Treasuries with longer maturities, not pay interest on reserves, just to name a few." ...to which they respond, well they were worried about "inflation taking off." Well, which is it?
ReplyDeleteExcellent commentary by Beckworth.
ReplyDeleteIf even good reporters fall down on this topic, how can we expect the public or laypersons to ever catch on?