Back in September I was part of the Monetary Policy Rules for a Post-Crisis World conference. It was jointly hosted by the Mercatus Center and the Cato Institute. There were many interesting presentations from folks like David Laidler, Perry Merhling, Robert Hetzel, Miles Kimball, Peter Ireland, John Taylor, and Scott Sumner. The panel moderators--Ylan Q. Mui, Ryan Avent, Cardiff Garcia, and Greg Ip--were great too!
I wanted to share the working paper I presented at the conference. It was titled The Fed's Dirty Little Secret and now is posted online. This paper had its origins in an earlier blog post of mine. It was fun taking an idea sketched out on this blog and turning into a paper. Below is the paper's abstract:
Despite the Federal Reserve’s use of QE programs, the U.S. economy experienced one of the weakest recoveries on record following the Great Recession. Not only was real growth disappointingly low, but even nominal growth over which monetary policy has more control was feeble. Why did QE fail to stimulate robust aggregate demand growth? This paper argues the answer is that the Federal Reserve could not credibly commit to a permanent expansion of the monetary base under QE. Both the quantity theory of money and New Keynesian theory show, however, that a permanent expansion of the monetary base is needed to spur aggregate demand growth at the ZLB. The Federal Reserve’s inability to do so meant its QE program got consigned to ‘irrelevance results’ of Krugman (1998) and Eggertson and Woodford (2003) and were never going to spark a strong a recovery. This is the Fed’s dirty little secret. Moving forward, this inability to commit to permanent expansions of the monetary base at the ZLB will continue to weigh down on the effectiveness of Fed policy. As a result, this paper calls for a new monetary policy regime of a NGDP level target that is backstopped by the U.S. Treasury Department.
Please take a look and feel free to provide feedback.
For those interested, the video presentation my panel at the conference is below. As you can see, my panel consisted of Miles Kimball, Peter Ireland, and myself. Greg Ip was the panel moderator.