Market monetarism in 2013
By Scott Sumner
Yes, it’s been a very good year. Of course what’s been getting all the attention is that the year began with our opponents saying that 2013 would be the test of market monetarism. Then when we passed with flying colors, they decided that no such test had actually occurred. But there’s lots more:
1. Early in the year, Mark Carney started saying nice things about NGDP targeting. Then he took over at the Bank of England, and instituted forward guidance. Britain begins recovering faster. Not saying there is any cause and effect there, but it’s still nice to see. And remember, monetary policy works with long and variable leads.
2. A few years ago Switzerland successfully depreciated the franc against the euro, then pegged at 1.20, despite the skepticism of Keynesians. The peg held in 2013.
3. Inflation and interest rates stayed quite low, contrary to the prediction of non-market monetarist conservatives.
4. Japan succeeded in depreciating the yen sharply, leading many people to become a bit more skeptical of monetary policy impotence at the zero bound. Again, some Keynesians had been skeptical about the ability of monetary policy to weaken the yen at the zero bound.
5. Early in the Summers–Yellen contest many liberal pundits were somewhat neutral. Then market monetarists like myself start screaming that Summers would be a disaster. He doesn’t believe monetary policy is effective at the zero bound, and seems unusually concerned that low rates will lead to bubbles. Liberals like Krugman and Yglesias start edging away from Summers. He eventually has to drop out, mostly due to opposition on the left.
6. There is a serious discussion of the possible use of negative interest on reserves in the eurozone. This is an idea first published by market monetarists.
7. Market monetarists (and New Keynesians like Svensson) had warned against raising rates when it was expected the economy would fall short of the targets for aggregate demand. The eurozone and Sweden did so anyway. In 2013 both had to cut rates in an implicit admission that we were right all along.
8. Even the loses have silver linings. The premature attempt to taper sends markets sharply lower, as MARKET monetarists predict. (Brad Delong notes that this weakens the monetary impotence argument.) This makes the Fed back off in September. When they finally do taper they feel compelled to sweeten the package with more dovish forward guidance, and markets actually rise in relief. Nick Rowe’s “Chuck Norris effect” in action.
9. For myself, I was caught off guard by the rise in long term rates on rumors of tapering. Although MM suggests that monetary policy can either raise or lower rates, depending on the relative strength of the liquidity and Fisher/income effects, based on earlier QE announcements I leaned toward the view that rates would fall. They rose modestly on tapering news.
10. Keynesians have to continually rewrite history to fit the new reality. Here’s a comment by Britmouse that provides a good example (he’s explaining that the low British output reflected low productivity, not low employment levels):
It’s “supply-side fiscalism” – austerity as a supply-side explanation for reducing output. I posted recently showing that hours worked is 3% higher than expected at the time of the 2011 budget, yet output/hour is 7% lower. This is sufficient to more than explain why RGDP is weaker than was expected at the time.
I find it astonishing that Krugman and Wren-Lewis, having done post after post in 2012 describing how the UK does have real fiscal austerity in 2012, are suddenly happy to now argue that a relaxation of fiscal austerity in 2012 is the “reason” for GDP recovery in… erm, 2013.
In my view market monetarists have put NGDP onto the radar screen so that never again will US monetary policymakers allow such a large reduction in NGDP growth without taking far more aggressive actions to stimulate nominal spending. It’s no longer an invisible variable.
The ECB? I have no idea what they are thinking.