Friday, October 21, 2011

The Six Myths of US Monetary Policy During the Great Recession

Clark Johnson has written an article (here for smaller file size) that does a fabulous job addressing the six common myths about U.S. monetary policy since 2008. It is accessible but informed and should be required reading for anyone thinking about U.S. monetary policy.  I am adding it to my required reading list for my money and banking class.  It is really that good. 

Here are the six myths Johnson addresses:
Myth 1:  The Federal Reserve has followed a highly expansionary monetary policy since August, 2008.
Myth 2:  Recoveries from recessions triggered by financial crises are necessarily low.
Myth 3:  Monetary policy becomes ineffective when short-term interest rates fall close to zero.
Myth 4:  The greater the indebtedness incurred during growth years, the larger the subsequent need for debt reduction and the greater the downturn.
Myth 5:  When money policy breaks down there is a plausible case for a fiscal response.
Myth 6:  The rising prices of food and other commodities are evidence of expansionary policy and inflationary pressure.
Read the rest of the article.


  1. David Beckworth--

    At the risk of sounding presumptuous, I want to ask you this: Have you contacted Fisher, the Dallas Fed president?

    As you are brother Texans, perhaps he would grant you an audience.

    Yes, it is unlikely he would be converted on the spot, but perhaps he would become a bit less clueless.

    You have put together many compelling arguments. If Fisher was informed it was conservatives who are pushing NGDP, he might become open to it.

    Yes, partisan politics trumps everything.

  2. Work with the other major central banks to engineer an increase in interest rates? What?

    It would be interesting to see a central bank saying that it will undertake open market purchases until the federal funds rate rises from .25% to 2%. Perhaps Kocherlakota would go for it.

    Generally, I would think the better approach is to just say that interest rates will do what market forces make them do. Any contraint that keeps them from falling is likely to be counterproductive in my view.

    The way I see it, each agent should think that interest rates will fall "too low" if other agents don't believe that prices and/or output will rise. And so, they will make more expenditures in that scenario. But, if other agents do expect output and/or prices to rise, then output and/or prices will rise, and so, each agent still will make more expenditures.

    Saying that we won't let interest rates fall (or we won't let prices rise,) will interfere with getting nominal GDP to rise.

  3. Bill, that was exactly my reaction. It is an excellent paper. In fact it could become a classic, but the idea of coordinated global interest rate hike puzzle me quite a bit.

    Sure thing if you allowed the market to set interest rates and announce a NGDP rule then pretty soon rates would be higher - because inflation expectations would be higher, but I am not sure that that is what Johnson mean.

  4. I think Johnson was advocating a rise of interest rates but only within the context of a vigorous QE program. The rise in interest rates would encourage banks to lend, as opposed to collecting IOR.