This seems to be a methodology Monday Tuesday (oh well)! But not as wonkish this time.
Henry Kaspar has a good piece laying out his differences with what he calls “quasi-monetarists”, economists who view the current slump as essentially a problem of too much demand for money, and therefore subject to a monetary solution. I basically agree with his diagnosis of where we are, but I thought I might add a bit more to the interpretation.
So: an overall shortfall of demand, in which people just don’t want to buy enough goods to maintain full employment, can only happen in a monetary economy; it’s correct to say that what’s happening in such a situation is that people are trying to hoard money instead (which is the moral of the story of the baby-sitting coop). And this problem can ordinarily be solved by simply providing more money.
But we’re not in an ordinary situation here, we’re in a liquidity trap in which short-term interest rates have been driven to zero, yet the economy still languishes.
What that means is that when people are hoarding money, they’re no longer doing so because of its moneyness — the liquidity it provides, which makes money different from other assets. They’ve already got all the liquidity they want, since liquidity is free — you don’t have to sacrifice interest earnings to get more, so people are saturated. So at the margin, they’re holding money simply as a store of value.
Now, what monetary policy ordinarily involves is open-market operations: the central bank increases the supply of money by purchasing and removing from the market non-money assets. And this has traction because money is different from these other assets. In a liquidity trap, however, money isn’t different: at the margin an open-market operation just exchanges one store of value for another, with no economic effect.
So this is a situation in which the economic problems cannot be solved just by increasing the supply of money.
Now, in principle you can get traction by making money a less attractive store of value. In particular, if you can credibly promise future inflation, that will make the real return on money negative. But getting that kind of credibility is tricky, especially given the normal prejudices of central bankers. And in any case it’s very different from the kind of thinking we normally associate with monetarism, which focuses on the current money supply.
Nor does focusing on nominal GDP instead of M2 or whatever really bridge the gap. The point about M2-based monetarism was that it was supposed to give the Fed a target it could clearly control — although in a liquidity trap it turns out that even that isn’t true. Whatever else it is, and whatever virtues it may have, nominal GDP isn’t that kind of target.
My broader take on this is that the quasi-monetarists are trying too hard to find a deep essence when what’s really needed is just a model. Let’s tell a story about what economic players do, and see what it says about policy options. That’s all it takes.
http://krugman.blogs.nytimes.com/2011/09/13/the-problem-with-quasi-monetarism/?smid=tw-NytimesKrugman&seid=auto
Henry Kaspar has a good piece laying out his differences with what he calls “quasi-monetarists”, economists who view the current slump as essentially a problem of too much demand for money, and therefore subject to a monetary solution. I basically agree with his diagnosis of where we are, but I thought I might add a bit more to the interpretation.
So: an overall shortfall of demand, in which people just don’t want to buy enough goods to maintain full employment, can only happen in a monetary economy; it’s correct to say that what’s happening in such a situation is that people are trying to hoard money instead (which is the moral of the story of the baby-sitting coop). And this problem can ordinarily be solved by simply providing more money.
But we’re not in an ordinary situation here, we’re in a liquidity trap in which short-term interest rates have been driven to zero, yet the economy still languishes.
What that means is that when people are hoarding money, they’re no longer doing so because of its moneyness — the liquidity it provides, which makes money different from other assets. They’ve already got all the liquidity they want, since liquidity is free — you don’t have to sacrifice interest earnings to get more, so people are saturated. So at the margin, they’re holding money simply as a store of value.
Now, what monetary policy ordinarily involves is open-market operations: the central bank increases the supply of money by purchasing and removing from the market non-money assets. And this has traction because money is different from these other assets. In a liquidity trap, however, money isn’t different: at the margin an open-market operation just exchanges one store of value for another, with no economic effect.
So this is a situation in which the economic problems cannot be solved just by increasing the supply of money.
Now, in principle you can get traction by making money a less attractive store of value. In particular, if you can credibly promise future inflation, that will make the real return on money negative. But getting that kind of credibility is tricky, especially given the normal prejudices of central bankers. And in any case it’s very different from the kind of thinking we normally associate with monetarism, which focuses on the current money supply.
Nor does focusing on nominal GDP instead of M2 or whatever really bridge the gap. The point about M2-based monetarism was that it was supposed to give the Fed a target it could clearly control — although in a liquidity trap it turns out that even that isn’t true. Whatever else it is, and whatever virtues it may have, nominal GDP isn’t that kind of target.
My broader take on this is that the quasi-monetarists are trying too hard to find a deep essence when what’s really needed is just a model. Let’s tell a story about what economic players do, and see what it says about policy options. That’s all it takes.
http://krugman.blogs.nytimes.com/2011/09/13/the-problem-with-quasi-monetarism/?smid=tw-NytimesKrugman&seid=auto
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