Christina Romer: Empiricists and Theorists on Federal Reserve Policy
Gaddafi Nearing His End?

Mark Thoma's Frustration


Economist's View: I have never argued that monetary policy won't work at all when the economy is near the zero bound. What I have said is that monetary policy alone cannot close the output and employment gaps in severe recessions, and that fiscal policy has an important role to play.... I have called for more aggressive QE... I complained about the Fed waiting until the election was over before announcing the policy -- and I have also called for more aggressive fiscal policy. When I respond to those who call solely for monetary policy, it is not because I think that monetary policy won't work at all, it's because monetary policy alone is likely to be insufficient.... From the very start of this crisis, I have called for a portfolio of policies as a response to our considerable uncertainty over both monetary and fiscal policy multipliers. My view is that fiscal policy is more powerful than monetary policy in severe recessions, but we don't know all that much about these multipliers in normal times, and we know even less about how they work in severe recessions (most estimates of monetary and fiscal policy multipliers come from models that don't connect the financial and real sectors very well, and hence miss a key transmission mechanism in this recession, and the studies use data that mostly come from normal times). The portfolio approach is useful when there is so much uncertainty over the effectiveness of policy because if one of the policies doesn't work as well as hoped, perhaps another will fill the void.... We haven't done enough of either type of policy, and what we have done has been put into place much later than would have been optimal....

I also believe that what has been done on both the monetary and fiscal policy fronts has helped. The empirical evidence isn't all in and won't be for some time, but my reading of the evidence to date is that these policies helped to avoid a much worse outcome.... Right now, we could use more of both types of policy, it's not too late to do more given the expectation that full recovery of employment is years away. Thus, I am also frustrated with the "painfully small additional aid for a very troubled economy," but my frustration is not just with monetary policymakers. Fiscal policymakers have also failed to do enough.