I don't favor an interventionist monetary policy to fix recessions
By Scott Sumner
Jose Romeu Robazzi recently left the following comment:
“IMHO the disagreement between keynesians and monetarists remain the same: both schools identify AD shortfall as a problem, and both schools recommend some sort of intervention (e.g. wealth transfers to sustain AD): monetarists suggest monetary policy (with its associated Cantillon and “hot potatoes” effects) and keynesians recommend outright government spending to make up for AD shortfall (maybe associated with some sort of wealth taxation and negative taxes for the poor).”
I believe this is a fairly common view, but I also think it’s wrong. Speaking for myself, I do not support intervention to address demand shortfalls. Rather, I prefer a mechanical rule that would peg the price of NGDP futures contracts.
Now I suppose one could argue that even my proposal is “interventionist”, and in a sense that’s true, but it doesn’t become more interventionist when there is a recession. Here’s an analogy. Consider the old gold standard, where central banks bought and sold gold on demand, at a fixed price. Was that policy interventionist? In one sense yes, the central bank (or treasury) intervened in the international gold market. But would anyone serious claim that under the pre-1914 gold standard most governments “intervened to address AD shortfalls”? No, they simply pegged the price of a particular asset, and let the chips fall where they may. In contrast, I propose pegging the price of a particular asset, and letting the chips fall where they may. Oh wait, that sounds kind of similar, doesn’t it?
Again, people are free to use terms like “intervention” in any way they wish, but in my opinion these terms do more to obfuscate than enlighten. For instance, in my view the Fed’s mistake in late 2007 and early 2008 was not its failure to “intervene” to prevent a recession, but rather that the Fed did intervene and caused a sharp slowdown in AD, triggering a recession. How did it intervene? By bringing the growth in the monetary base that had been occurring for many years to a sudden stop. You may define what happened differently, and that’s fine. But “intervention” is simply not a useful part of the discussion.
And I’d say the same about Jose’s comments on Keynesians. Lots of Keynesians do favor wealth redistribution, but there isn’t any necessary linkage. As I point out in this post, it’s perfectly possible to be a conservative Keynesian and favor small government. You can simply use tax cuts as your preferred form of fiscal stimulus.
PS. George Selgin argues that it’s more accurate to say that a true gold standard defines the currency unit, rather than pegs the price of gold. So my comparison is with a gold standard that involves a central bank or treasury that buys and sells gold.