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Skeptical of the Federal Reserve


Matthew Yglesias writes:

Yglesias » Degrees of Monetary Skepticism: I had a little exchange on Twitter yesterday about “monetary policy skeptics”... it’s useful to draw some distinctions.... [Some] people... are “skeptical” in the sense of “skeptical that monetary policymakers will in fact do what’s necessary” (this is the view of Atrios, Goldman Sachs’ Jan Hatzius, etc.)[, while others are]... “skeptical” in the sense of “skeptical that monetary measures can be made to work” which I believe is the view of Mark Thoma and Dean Baker and others.... [A] lack of clarity on these points sometimes confuses people about what happened in Japan....

[S]ome readers... [think] that the Bank of Japan spent a lot of time trying to create inflation and failed. That’s not really what happened. Instead, the Bank of Japan spent a fair amount of time trying to fight deflation and had limited but real success. They always indicated, however, that they wanted “price stability” not inflation and certainly not catchup level-targeting of anything. This kind of stop/start policymaking does exactly what it’s supposed to do... it can’t really lift the price level or the economy. But that’s not to say policymakers don’t have the ability to say that unorthodox measures will remain in place until full employment resumes... they’ve simply chosen not to do so.

The two shade into each other. If the Federal Reserve could undertake small, simple, powerful interventions to return the economy to full employment, it would probably do so. But if it requires very large and very complicated interventions--well, is it because the measures it is willing to do are too weak too work, or is it because it is not willing to do what is needed? To some degree the answer is both.

And, no, I don't think buying $1 trillion of long-term Treasury and GSE bonds will do it. You are just acting on the duration and the government interest rate risk premiums, and that's probably not enough to give you real traction on the private spending side.