If we want things to stay as they are, things will have to change
By Scott Sumner
I checked out the financial news network yesterday afternoon, and one commentator was incredulous that people were asking the Fed to step in to help solve the coronavirus epidemic. Of course there have also been eyes rolled in response to calls for central banks to address climate change. I certainly agree with those who are skeptical of central banks getting involved with climate change, and even have some sympathy for skepticism that central banks can do anything about the coronavirus. And yet . . .
This all reminded me of the famous line in The Leopard (which is the title of this post.) Yes, there is no need to change monetary policy in response to the coronavirus, but what does it mean to “not change monetary policy?” I’m pretty sure that the commentator would view a change in interest rates as constituting a change in monetary policy, but frequent readers of this blog know that I strongly dissent from that view. Indeed I’ve devoted much of the past decade to the almost hopeless task of convincing people that interest rates are not monetary policy. Consider two alternative views:
Market monetarist: Neutral monetary policy is stable NGDP growth that leads to on-target inflation. Easy money is excessively fast NGDP growth and tight money is excessively slow NGDP growth.
New Keynesian: Neutral policy is keeping the policy interest rate equal to the equilibrium or neutral interest rate, whereas tight money is a policy rate above the equilibrium rate and easy money is a policy rate below the equilibrium rate.
Under either of these two criteria (which are actually pretty similar), there is absolutely no reason to change monetary policy in response to the coronavirus. NGDP growth should continue at about 4%/year and the target interest rate should be adjusted daily to move in tandem with the equilibrium rate.
So why the mysterious Zen-like title of the post, which sounds sort of like a kōan? Because for monetary policy to stay the same, almost everything else must change. The money supply must change, the interest rate must change, and the exchange rate must change.
If you think I’m being too cute here, recall that (prior to 2008) holding the money supply constant generally required a change in the interest rate, and vice versa. So it’s not necessary to be a market monetarist to buy into the claim in the title of the post.
The Leopard was also made into an excellent film, directed by Visconti: