There's no reason to go heterodox
By Scott Sumner
Commenter Michael Sandifer had this to say:
Seeing so many developed economies at negative nominal rates, with others trending there, as the global economy slows down, with those economies never having enjoyed even the nominal growth rates of the past, it is tempting to think there’s something very wrong with standard economic theory. And, perhaps there is. By standard economic theory, I mean Mishkin’s pre-Great Recession treatment of the subject. I bought an old copy of his textbook, after reading this blog.
But, there was a similar situation in the 70s, but opposite. Nominal growth was too high in most developed economies, and Volcker and others apparently showed that it was an easy problem to deal with, intellectually.
So, until central banks try something like NGDP level targeting, more deeply negative rates, with some changes suggested by Miles Kimball, etc., there’s no reason to go heterodox.
During the 1970s, high interest rates did not seem to slow inflation. As a result, all sorts of heterodox theories of inflation were invented. Too much union power, crop failures, monopoly power, budget deficits, oil prices. And each one failed, because it was monetary policy that was driving 11% NGDP growth (1971-81), which made 8% inflation inevitable. As soon as Volcker did an orthodox tight money policy, inflation promptly came down and heterodox theories of inflation were abandoned. Heterodox macro theories are the result of bad macro policies.
As soon as the world’s central banks adopt NGDP level targeting combined with a “whatever it takes” approach to QE, all these now fashionable heterodox theories of monetary impotence will fade away. The theory that we need fiscal stimulus will come to seem just as silly as the 1970s claim (by the best and the brightest) that we needed wage/price controls.