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Macroeconomics
expectations can be shaped far more effectively by speaking directly about future policy, rather than leaving it to be inferred from actions that have no definite implications for the future.
Words speak louder than actions? Woodford is a Leading Figure in the New Macroeconomics.
Which I hold in contempt. I think that if the Fed wants to pursue an expansionary policy, it should start by getting rid of the interest on reserves. That 25 basis points does not seem so small when short-term Treasury rates are as low as they are.
READER COMMENTS
Charles R. Williams
Aug 26 2011 at 8:31am
To be fair to Woodford, some actions are ambiguous where clearly stated intentions about future actions would not be.
But Woodford’s diagnosis of QE2 is wrong. As you say, paying 25 basis points on excess reserves is a disincentive to putting the money to work. Even worse is buying T-bonds, which play an active role in financial intermediation, with newly created idle reserves. Woodford thinks banks will not put the reserves to work if they know that in aggregate the fed will withdraw excess reserves once the economy picks up. This is unpersuasive.
OneEyedMan
Aug 26 2011 at 9:50am
This is a bit like the statistical pile-up problem. There can be multiple policies governing future actions consistent with today’s, so being explicit about your plan can help markets understand what you are doing. On the other hand, retaining interest rates on reserves suggests that we haven’t actually made rates as low as we could. This raises the possibility that the Fed may not wish to have rates any lower., In that case, it isn’t a communication problem but one of intentions.
Nick Rowe
Aug 26 2011 at 10:22am
This is going to inspire me to write a post some day. About how all monetary policy is really just words. Money itself is just words on a bit of paper. Or keystrokes on a computer. And none of it means anything really, except that we choose to believe it, and choose to act in response to those ink-marks and keystrokes.
In fact, the whole market economy is really about just words. Exchange is just words: “You can have it for $5”; “Done!”. The physical actions follow later.
Property rights are just words too. The judge says “Google owns that copyright”, and next thing you know a lot of actions change too.
Even silent barter is really just unspoken words. They left those yams on the beach. Did they *mean* by that action that they are offering those yams for sale?
Jeff
Aug 26 2011 at 11:23am
Nick, your post is just words.
James Oswald
Aug 26 2011 at 11:24am
Yes we do! Entrepreneurs need to be able to predict future policy. Better to have consistent 3% inflation than 0% or 6% with 50% probabilities. Central banks need credible commitment devices as well, but they do exist.
Matt C
Aug 26 2011 at 1:43pm
Who would trust our benevolent leaders if they were claiming to speak directly?
They told us The Fundamentals Are Sound in the housing market, right up until the crash. Does anyone think they believed this?
They have told us continually for the past three years that the recession is now over. Green shoots and all of that.
Telling us they want banks to start lending and then paying the banks to hold reserves is another good one.
God alone knows what really happened with the TARP guarantees and “repayments” and the money shell games they were playing back then. But it was clear they were obfuscating the truth as hard as they could.
Really, who believes these guys? If you take anything they say at face value, you’re a sap.
Matt C
Aug 26 2011 at 1:48pm
James, how could Bernanke et al credibly commit to (say) 3% inflation over the next ten years? If you have a realistic mechanism to demonstrate committment, I’m very curious.
Alex Godofsky
Aug 26 2011 at 4:36pm
The mechanism is that he, and the Fed as an institution, would find it extremely embarrassing to renege.
Steve Roth
Aug 27 2011 at 12:34pm
Arnold, I asked Scott Sumner this in comments and he (self-admittedly) dodged the question:
If the Fed, tomorrow, dropped IOR rates to zero or even negative, what would you predict the effects to be on:
Inflation
NGDP
Unemployment
I’m really not questioning or challenging either of you. I’m curious to know what you think.
We’re in an unusual situation right now, of course, with all those excess reserves and big treasury holdings by the Fed. So the question is really related to this particular moment in time.
Comments are closed.