Much talk of monetary policy failure since 08. Critics have a point, but (imo) overestimate what MP (e.g., open-ended LSAPs) could have achieved. Moreover, focus on MP averts attention from this brutal chart. 
Wanting a smaller government is one thing. Timing the adjustment during crisis not wise. How much way recovery hampered? Consider the following back-of-the-envelope counterfactual: suppose real per capita G continued to grow at following rate:
Assume that other components of GDP follow their actual path (in reality, we'd expect this not to be true exactly, but this is the thought experiment). Here is what the counterfactual G/Y does:
So in my counterfactual, G/Y declines, but not as rapidly as it did. Here is what real per capita GDP looks like:
And if we apply a rough Okun's law relationship between GDP and unemployment, here's what the unemployment rate might have looked like.
Unemployment rate declines to 4% in 2015 instead of 2018. If true, then even a *passive* fiscal policy would have measurably sped up the recovery. An actual increase in G, timed appropriately, would have sped up even more. At the time, MP was ZIRP and LSAPs.
Do people really believe that more ZIRP and LSAPs at the time would have had this type of impact? Just something to think about. 🙂Am off to our monetary and fiscal policy conference now: events.stlouisfed.org/event/6c17e13a…
