{"id":278760,"date":"2010-02-04T12:03:59","date_gmt":"2010-02-04T17:03:59","guid":{"rendered":"tag:http:\/\/www.economist.com,2009:21004658"},"modified":"2010-02-04T12:03:59","modified_gmt":"2010-02-04T17:03:59","slug":"the-monetary-constraint","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/278760","title":{"rendered":"The monetary constraint"},"content":{"rendered":"

SCOTT SUMNER writes<\/a>:<\/p>\n

\n

In February I said fiscal stimulus wouldn\u2019t work, as the Fed had some sort of nominal aggregate target in mind, and was going to simply offset the fiscal stimulus. And that is what happened. In March when things looked scary, like a Depression was possible, the Fed announced its big program of buying Treasuries and MBSs. Later in the year when things picked up a bit, and we were clearly going to avoid a depression, the Fed started furiously back-peddling. They started talking about ending the bond buying program and \u201cexit strategies.\u201d Ask yourself this; what does that back and forth behavior tell you? It tells me the Fed has some sort of implicit nominal target, and if the economy seems to fall short they\u2019ll pull out all the stops and flood the economy with liquidity. That\u2019s why the $800 billion dollar fiscal stimulus was a complete waste of money; the Fed wasn\u2019t going to allow NGDP to fall much further than the actual 2.5% it fell. Shame on us for not figuring that out, and shame on the Fed for not explaining that to us.<\/p>\n<\/blockquote>\n

Matt Yglesias adds<\/a>:<\/p>\n

\n

I think maybe you need an academic\u2019s confidence in his own theories to accept this as a reason to have avoided stimulus back in early 2009. As either a blogger or a policymaker, I\u2019m more comfortable with the idea of joint fiscal and monetary measures to fight a downturn. But the most important point here is that fiscal policy can\u2019t swim against the monetary tide. If the FOMC doesn\u2019t want aggressive stimulus to aggregate demand to fight unemployment, then it just doesn\u2019t happen. Voters hold elected officials responsible for macroeconomic performance, but this is mainly determined by the Fed. And the Fed has given every indication since autumn 2009 or so that it\u2019s very comfortable with a slow recovery.<\/p>\n<\/blockquote>\n

In a follow-up post, Mr Sumner seems to challenge Mr Yglesias’ contention that fiscal stimulus was a good idea. I think Mr Yglesias’ point stands. Monetary policy is not an exact science. If we believe the Fed is in complete control, we need to ask why they allowed such a significant decline in output to occur in the first place. If we instead argue that the Fed had the ability to prevent a decline in output of more than 2.5%, but it was powerless to close the gap beyond that, well, fiscal expansion was a good idea. Remember that the Fed’s own forecasts are for weak growth in 2010\u2014growth in nominal output of 3.5% to 5%, which is pretty low considering the size of the output gap. The Congressional Budget Office is predicting growth in nominal GDP of 3.2% this year and 2.8% next year. That’s very, very slow. If the Fed has been entirely offsetting fiscal stimulus in this environment, then perhaps Ron “End the Fed” Paul has a point after all.<\/p>\n

Still, it remains the case that monetary tightening will undermine fiscal expansion. Given that, American workers should be very worried indeed. Many analysts have been saying that while the Fed will end its asset purchases this year, it’s unlikely to actually raise interest rates until 2011. Markets don’t agree. Fed fund futures indicate that a change in the target from “0% to 0.25%” to 0.25% could occur by late summer, with an increase to 0.5% by the fall. Even with the additional stimulus measures proposed in the president’s budget, Fiscal 2011, which begins in October, is going to bring with it some significant fiscal retrenchment. The original stimulus will shift from a net boost to growth to a net drag by mid-year. The economy had better get its feet under it by the summer, because the rug will be pulled out from under it thereafter.<\/p>\n

But not according to Mr Sumner, who says the Fed will jump back in if necessary. Maybe so, but again, markets are anticipating rate increases in 2010.<\/p>\n

Here<\/a> is Mr Sumner’s latest post, defending the efficient-markets hypothesis.<\/p>\n","protected":false},"excerpt":{"rendered":"

SCOTT SUMNER writes: In February I said fiscal stimulus wouldn\u2019t work, as the Fed had some sort of nominal aggregate target in mind, and was going to simply offset the fiscal stimulus. And that is what happened. In March when things looked scary, like a Depression was possible, the Fed announced its big program of […]<\/p>\n","protected":false},"author":4534,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-278760","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/278760","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/4534"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=278760"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/278760\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=278760"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=278760"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=278760"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}