Comment of the Day: VSPs and the Case of the Disappearing BPEA: "Brad Delong has nice things to say about my old Brookings Paper on Economic Activity on the liquidity trap...:
...and asks why central bankers still don’t seem to get some of the basic points I made way back then, especially about the desirability of a higher inflation target. I actually have a few thoughts, which are inevitably mostly — but not entirely! — self-serving. First, most trivially... I suspect that fewer macroeconomists have actually read that paper.... I still run into people who believe that the modern liquidity-trap literature started with Eggertsson and Woodford, which was written several years later, and that my piece must have been a commentary on theirs (which was very good!) And it’s been very clear that remarkably few people read what I had to say about financial intermediaries and monetary aggregates, even though that has turned out, I’d argue, to be a really important insight. This comes, I think, from... micro-tribalism.... I have never been part of the domestic-economy macroeconomic regular circuit, so some of them couldn’t believe that I could have something new to tell them (or were simply unaware that the paper even existed.) After all, in the early stages of the crisis response you encountered lots of macroeconomists asserting that ‘nobody’ had discussed fiscal policy in recent years, even though Obstfeld and Rogoff had done plenty in their big 1996 book; the point is that Obstfeld and Rogoff were in the international macro circuit, and domestic guys weren’t listening. Oh, and by the time some of them may have gotten a clue that I wrote something they maybe should read, I was politically controversial, which shouldn’t matter but does. In effect, some people may have been unwilling to consider that I might have been right about macroeconomics because I had committed the unforgivable sin of being right about Iraq. (I told you this would be self-serving!)
Second, the whole story of our woeful crisis response has been that Very Serious People seize on orthodoxies that are grounded more in their gut feelings and the comfort that comes from repeating what everyone else says than in economic analysis. Central bankers are more given to analytical thinking than most, but it’s still a very brave official who disputes the orthodoxy of 2 percent, even though the original rationale for that target--it was supposed to make the zero lower bound no problem--has long since evaporated.
Finally, to be fair, there are arguments one can make that go beyond what I said in 1998. Some models of sticky prices suggest that inflation may have bigger costs than conventional models imply. I don’t find these models plausible, but it’s not all gut feelings here. The bottom line, however, is that while you might think it obvious that a clearly relevant paper by a well-known guy with all the right credentials must be widely understood by people who matter, it ain’t necessarily so.