Yglesias on monetary policy
Matt Yglesias has a new post that explains his views on monetary policy. Overall, Yglesias’s views are to the left of mine. For instance, he favors the aggressive use of fiscal policy, whereas I am skeptical. But on monetary policy our views align in quite a few areas. Readers of my two blogs are familiar with arguments similar to the following:
1. No “wait and see”:
Now there are lags here, but they are lags in the sense that financial investments (the price of copper going up) happen faster than physical investments (because copper is more expensive now, the copper mines increase production). But the proximate mechanism is essentially instantaneous. If your goal in an inflationary environment is to reduce expectations of future nominal growth, then you can tell more or less immediately whether or not that happened by looking at financial markets. And critically, while doing things can and does influence expectations, so does talking about doing things.
2. Beyond hawks and doves:
Another implication of my view is that when you have clearly overshot, it’s time to pivot hard. This is why after over a decade of being one of the most dovish figures in the macroeconomic debate, I’m now very much on the hawkish side. Economy-wide nominal spending and nominal income have fully recovered to their pre-pandemic trends. Whatever economic problems we have today are not problems of inadequate demand
3. Do “whatever it takes”:
What we need is for Powell and company to say clearly, and repeatedly, that they are proud and excited that nominal income has fully recovered but that since it has fully recovered, they want it to grow more slowly in the future than it did this year. . . . What will they do to accomplish that? Well, they will accelerate tapering. They will do an interest rate hike or two. If necessary, they will do three or however many are needed to hit their target. They could do 17! They won’t, of course, but they could. And the point is that if people believe they will do whatever it takes, then it won’t actually take much doing — the markets do it themselves.
I strongly encourage people to read Yglesias’s entire substack post.
PS. Of course expectations must be about something. Keynesians would argue that they are about the future path of short-term interest rates (relative to the time-varying natural interest rate if you are a sophisticated Keynesian.) I say they are about future expected changes in the supply and demand for base money.