At the moment we are rightly focused on stimulus/relief fiscal packages. But going forward, imo, progressive economists should be pushing conversation about fundamental principles of monetary policy. (thread)
In coming years, I think there will be a permanent shift away from idea that changes in a single policy rate can be the sole or central tool of monetary policy (let alone of policy in general), for several reasons.
First, one lesson of past dozen years is that changes in the policy rate are much less powerful & reliable tools for influencing output, employment etc. than people used to think. (Honestly should have been clear already, but definitely clear now.) Broader problem than just ZLB.
Part of the problem is weak link between policy rate and markets rates. And when changes to policy rate do get passed thru, effect on asset values and servicing costs of existing debt can be much larger than effects on new borrowing, making effects nonlinear & unpredictable.
Loosening may have little effect until it tips into an asset bubble, then big ones. Tightening may have little effect until it tips into widespread defaults, then big ones.
Second, as we now know (and should have already) conventional monetary policy is never neutral. Some market rates more closely linked to policy rates than others. Some activities more dependent on external finance than others. Some borrowers more interest-sensitive than others.
If goal of monetary policy is to change credit conditions so as to shift level of activity with minimum effect on composition, would require much more active management of credit flows to offset these differences.
But is neutrality in that sense goal? Third factor is that faith in financial markets as directors of productive activity is less confident & universal than it used to be. Crises are sign of failures that need to be corrected not just then but in normal times as well.
Finally, financing may be important constraint on investment in decarbonization and other social goals. To the extent we want to direct credit toward some activities and away from others, no way to draw sharp line between that and "normal" monetary policy.
All these considerations should lead us to revisit broad range of credit-policy tools that existed historically, before field of vision got narrowed to single policy rate.
In part, credit policy just means central banks continuing to do things they're doing now, but with goal of supporting real activity rather than stabilizing financial system. This new paper by @DanielaGabor is good on this distinction. transformative-responses.org/wp-content/upl…
Two broad goals should be 1) when/if inflationary pressures do become a problem (I don't know rule this out), we have better tools to deal with them than blunderbuss of big hikes in policy rate. Yair Listokin's work could be one interesting place to look. hup.harvard.edu/catalog.php?is…
Second to ensure that, given that any new monetary policy tools will involve supporting/restraining particular kinds of credit, there is democratic discussion of how finance is directed. With decarbonization at center of this.
Gerald Epstein's work igives good overview of broad range of tools central banks have used historically.
If I understand Blanchard correctly, he thinks the Biden package will result in the rapid closing of the output gap, consistently on-target inflation for the first time in a decade, and a policy rate safely away from the zero lower bound.
It's very strange to see people say both (1) the zero lower bound on interest rates is a serious problem, and (2) we should under no circumstances pass a fiscal stimulus large enough to call for raising the policy rate above zero.
I think this is case where idea of R*, the natural or neutral rate of interest, imposes real costs. People who think the policy rate consistent with full employment is a function of "deep, structural" factors can't see how it also depends on fiscal position.
I think there's actually an important and non-obvious question here. When we talk about the multiplier from additional spending, how are we imagining that distributed over time?
When you say the multiplier is 1.5, does that mean you think 1) a dollar of public spending raises GDP by $1.50 this year, with no effect on GDP in future years? Or 2) $1.50 this year, plus some amount in future years? Or 3) a total of $1.50, distributed over several years?
If I understand him correctly, @GagnonMacro is using interpretation 1, while @ernietedeschi is using interpretation 3. It's not clear to me that literature on multipliers clearly distinguishes these cases.
To clarify/amplify @paulkrugman's point: in a normal recession, the goal of stimulus is to raise people’s incomes in order to boost spending and raise employment, until we get back to whatever we think full employment is.
But right now, while we want that to some extent, we also want to raise people’s incomes so they do *not* have to go back to work. It’s much more feasible to close restaurants for instance if the workers are getting $1,400 checks and enhanced UI benefits.
Big news: Mike Konczal’s Freedom from the Market is out. I got an early copy of the book and read it last month, but now that it’s officially published, you too can, and should, acquire and read it. Here’s a thread on interesting stuff from the book. 1/ thenewpress.com/books/freedom-…
The book is organized around a series of public programs for the non-market organization of various areas of economic life drawn from past 200 years of US history, that were conceived of as protecting or expanding freedom. 2/
First chapter is free land - distributing federal lands in West as homesteads. Might seem like odd example of “freedom from the market,” since at first glance is a program for distributing private property more widely. Idealized “market” often imagined as small farmers. 3/
This Jacobin interview making the case for a herd-immunity approach to the coronavirus is really distressingly bad. jacobinmag.com/2020/09/covid-…
Weird for a socialist magazine to ignore the existence of people who *work* at schools, who are not themselves children. Even weirder that interviewer doesn't challenge them on this.
More broadly, greater transmission in one setting means more people infected across the board.
It's nonsense to say that we must reach herd immunity one way or another. Vietnam, New Zealand, etc. will not reach herd immunity because *there are no cases there*. Lots of diseases have been controlled not through immunity, but by limiting transmission.
I think a big debate in macroeconomic policy circles in coming years will be between people who say "The federal response to the coronavirus was successful in maintaining incomes despite a deep fall in employment. That should now be our standard for future downturns" 1/2
vs people who say "The response to the coronavirus was successful in maintaining incomes despite a deep fall in employment. But now that crisis is over, we can go back to doing things the way we did before." 2/2
In other contexts, we don't ignore extreme cases, but regard them as natural experiments that are *more* informative than the usual range of variation. There's a reason e.g. David Card picked the Mariel boatlift as an ideal case to look for effect of labor supply shifts on wages.