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Monday Smackdown: John Taylor vs. Janet Yellen in Early 2009 Edition


Can anybody give me a model-based or a framework-based on an empirical data- or observation-based rationale for what John Taylor was saying here about Japan in early 2009?

Is there any coherent interpretation of what he was saying--other than that Republican politicians had decided to go all-in against expansionary fiscal policy because it was going to be run by Obama, and he wanted to please his political masters?

Anybody? Anybody? A reading of Japan as boosted significantly in 2001 by QE? Bueller?

John Taylor (2009): The Lack of an Empirical Rationale for a Revival of Discretionary Fiscal Policy: "Concerns [were] expressed about the limits of monetary policy if the zero bound on interest rates were to be reached...

...as it had in Japan in the 1990s.... [But] the lesson from Japan is that it was the shift toward increasing money growth—quantitative easing—in 2001 that finally led to the end of the lost decade of the 1990s. It was certainly not discretionary fiscal policy actions. Increasing money growth—or simply preventing it from falling as in the Great Depression—remains a powerful countercyclical policy.... There is no evidence in the past decade that suggests that monetary policy has run out of ammunition and must be supplemented by discretionary fiscal actions.

Janet Yellen (2009): Comments on “The Revival of Fiscal Policy”: "Here I part ways with John [Taylor]... the lessons from Japan’s recent experience

...with “quantitative easing.”... John asserts that the BOJ’s quantitative easing strategy worked well, while fiscal policy was ineffective. My interpretation of the evidence is exactly the opposite. The BOJ targeted an extraordinarily high level of excess reserves in the banking system, in the hope that a flood of such reserves might stimulate additional bank lending. The BOJ’s quantitative easing policy probably had some beneficial effect, but mainly because it symbolized the BOJ’s commitment to combat deflation by keeping interest rates at zero for an extended time.

The expectation of an extended period of zero short-term interest rates was probably instrumental in lowering longer-term nominal rates. But the expansion of excess reserves to extraordinary levels appears, on its own, to have had very little impact on financial conditions.

The Fed’s [current as of early 2009] “balance sheet” strategy has a different motivation... carefully tailored programs to remedy specific financial market dysfunctions... enhance liquidity in financial markets... improve the availability of term funding in the money market... restore the functioning of the commercial paper market, and... stimulate the issuance of new asset-backed securities to support lending to consumers and small businesses.

I am sanguine that the Fed’s new programs will be helpful in restoring credit flows. But many of the new approaches are experimental, and there is a great deal of uncertainty concerning their likely effects. Even with vigorous Fed action to restore credit flows, an extended period of economic weakness is likely. This explains why, in the statement following its December meeting, the FOMC noted that it anticipates that an exceptionally low level of the federal funds rate will be appropriate for some time.

For all of these reasons, I support Marty [Feldstein]’s conclusion that there is an exceptionally strong case for substantial fiscal stimulus over the next few years. In ordinary circumstances, there are good reasons why monetary, rather than fiscal policy, should be used for stabilization purposes. But these are exceptional circumstances, and fiscal policy can help get the economy going...

Monetary Policy In A Liquidity Trap The New York Times