Below the fold is a recent Twitter discussion I had with David Andolfatto and Noah Smith on Neo-Fisherism. The big takeaway from this conversation is that we all view the expected path of the consolidated government balance sheet as being a key determinant for current aggregate demand growth. This
understanding has been implicit in Market Monetarist's calls for level targeting and
explicit in our calls for a permanent expansion of the monetary base in a depressed economy. The fact that we have not seen rapid aggregate demand growth is strong evidence that the Fed's QE programs are not expected to permanently alter the consolidated government balance sheet.
The key difference between us that I see is that Neo-Fisherites question our
assumption that fiscal policy would not offset a central bank attempting to
permanently expand the monetary base. My reply is that if in a depressed economy monetary policy did go to some kind of level targeting (or a higher inflation target for folks like Paul Krugman) it would be a big regime change that would require political consensus and have Treasury's backing. Nick Rowe goes further and argues that even in a normal economy fiscal policy typically responds in a supportive role to monetary policy, not the other way around:
I am of the view that the Bank of Canada targets 2% inflation (or NGDP or whatever), and it adjusts the nominal interest rate (or base money or whatever) to hit that target, and its actions affect its profits, and those profits affect the government's spending and taxation decisions. In the long run, the government adjusts its budget to be consistent with the Bank of Canada's actions. Not vice versa. We saw that adjustment in 1995.
The point is that absent a troubled-state environment where fiscal policy does dominate and shape monetary policy actions (e.g. Zimbabwe 2008-2009) it is reasonable to assume the actions of fiscal policy will support and be consistent the objectives of monetary policy.
Along these lines, it is interesting to look back at my NGDP growth path target proposal that would have the U.S.Treasury Department take over and do helicopter drops when the Fed failed to hit some NGDP level target. My original motivation for this proposal was to insure against central bank incompetence in stabilizing aggregate demand. (The threat of the Treasury temporarily taking over monetary policy would also provide a strong incentives for Fed officials to do their job.) In doing so, however, this proposal would also serve to manage the expected path of the consolidated government balance sheet in a manner that would stabilize aggregate nominal expenditures. The proposal, then, is very Neo-Fisherian in spirit. So in some ways we are not all that different.
Thinking this through:
ReplyDeleteConsider two games of Chicken (with nobody holding an AK47):
1. if the central bank wanted to tighten, and the fiscal authority wanted to loosen, the only way the fiscal authority would win is if the fiscal authority eventually forced the monetary authority to monetise the fiscal authority's debt to prevent default.
2. If the central bank wanted to loosen, and the fiscal authority wanted to tighten, the only way the fiscal authority would win is if............the fiscal authority hoards the cash seigniorage profits the monetary authority gives it forever???? Rather hard to imagine.
Is there an asymmetry here?
I think it is hard to imagine that the change in seignorage profits is large enough to make much difference.
ReplyDeleteWhat happens when hand-to-hand currency disappears in 50 years, and bank reserves pay interest, so there is no seignorage?
By the way, it is not only possible, but I believe it is desirable, that the fiscal authority default rather than break the nominal anchor.
Nick and Bill, it is interesting to look at this issue in light of what we just learned about Japan, it has entered another recession (at least if you count two consecutive quarters of GDP decline). And from only a modest sales tax increase. What I think is happening there is not that the tax itself was so consequential, but that it signaled the expected consolidated government balance sheet will not be allowed to permanently expand. (Yes, even with the 200% debt to GDP ratio, the lack of robust aggregate nominal expenditures indicates this to be the case). What do you guys think?
ReplyDeleteI'm not sure I understand this. Ordinary monetary policy actions (OMO's) have almost no effect on the consolidated government balance sheet. They had a little bit of effect back in pre-IOR days, in that they swapped a non-interest-bearing liability for an interest-bearing one. Today even that effect is gone. On the face of it, it doesn't seem likely that the monetary authority is the major long-run influence on the consolidated government balance sheet when its typical actions have almost no effect. To a first approximation, the consolidated balance sheet is entirely under the treasury's direct control.
ReplyDeleteGranted, the monetary authority can influence the treasury by changing the treasury's cost of financing, and perhaps this influence is so strong that it completely determines the treasury's actions in the long run. But this doesn't seem like a very straightforward assumption.
Keynesian “pump priming” vs. Fed intervention - OMOs? You really mean transfer payments to non-productive recipients vs. putting money in the primary dealers pockets. Virtually all of the economic lexicon is obsolete.
ReplyDelete"They argue that a central bank holding interest rates low for a long period will cause inflation to fall"
ReplyDeleteYour talking about people that don't know the differences between money and liquid assets. Remunerating excess reserves (the Fed's credit control device), induces dis-intermediation among just the non-banks (reducing non-inflationary, or real-gDp, overall growth rates).
Hi David,
ReplyDelete“Below the fold is a recent Twitter discussion I had with David Andolfatto and Noah Smith on Neo-Fisherism. The big takeaway from this conversation is that we all view the expected path of the consolidated government balance sheet as being a key determinant for current aggregate demand growth. This understanding has been implicit in Market Monetarist’s calls for level targeting and explicit in our calls for a permanent expansion of the monetary base in a depressed economy. The fact that we have not seen rapid aggregate demand growth is strong evidence that the Fed’s QE programs are not expected to permanently alter the consolidated government balance sheet.
The key difference between us that I see is that Neo-Fisherites question our assumption that fiscal policy would not offset a central bank attempting to permanently expand the monetary base. My reply is that if in a depressed economy monetary policy did go to some kind of level targeting (or a higher inflation target for folks like Paul Krugman) it would be a big regime change that would require political consensus and have Treasury’s backing. Nick Rowe goes further and argues that even in a normal economy fiscal policy typically responds in a supportive role to monetary policy, not the other way around.”
Could you clarify: are you saying that NGDP level targeting implicitly depends on the stance of fiscal policy?
Targeting gDp means targeting monetary flows (our means-of-payment money times its transactions rate-of-turnover) – which is extremely easy (and doesn’t require a futures market for policy direction). Roc's in MVt are a proxy for all transactions in Irving Fisher's transaction concept (the "equation of exchange"). In the equation, whether you boost fiscal outlays vs. monetary intervention, is inconsequential. But you obviously get more “bang for the buck” without providing transfer payments to non-productive recipients.
ReplyDeleteThe euphemism for this phenomenon has been labeled by some as a liquidity issue (citing Oct 15 and May 6 downdrafts, despite my predictions on the same dates). I have the power to make Russia the most dominant economic power in the world (that’s why some money and banking statistics should be classified as “top secret”).