Monday, July 26, 2010

Yes, Virginia, there is still room for monetary stimulus

From Yglesias:
Timothy Geithner has already received appropriations to buy printer paper and toner cartridges for the Treasury Department. If Ben Bernanke is inclined to play along, there’s no bar stopping Geithner for literally firing up his word processor program and printing out pieces of paper that say “Take this to Ben Bernanke and he’ll give you $10,000.” Call such pieces of paper Geithnerbucks. Geithner can’t turn these Geithnerbucks into legal tender, but the Federal Reserve bank can decide to “buy very unconventional assets” such as pieces of paper printed out by Timothy Geithner. Such action, if undertaken at any substantial scale, would almost certainly cause people and businesses to become less inclined to hold cash and more inclined to trade their cash for some goods and/or services.

... What’s more important is how the Fed frames what it’s doing. If the Fed says it’s determined to push the price level up, and will keep trying things until it gets up to such-and-such a point then that will probably work. Conversely, if the Fed says it’s willing to intervene to prevent a total economic collapse but beyond that is determined to pursue a strategy of opportunistic disinflation then we won’t get robust recovery.
Beckworth agrees:
... technically the Fed has not increased the money supply a lot, it has only increased the monetary base a lot.  In fact, if one looks at MZM or M3 they are actually down for the year.
Sumner, naturally enough, also agrees:
If the Fed stops paying interest on reserves, and targets NGDP growth at a much higher rate than currently expected, then the real demand for base money would almost certainly be lower than today, not higher.  When you target expectations, the monetary base becomes endogenous.  So the question is not “How much money do we have to create to raise NGDP growth expectations up to the desired level?”  Rather the question is: “What is the real demand for base money if the Fed does target a much higher NGDP growth rate?” ...

It is very likely that much more rapid expected NGDP growth would be associated with higher nominal long term rates, and there are plausible forward-looking models where even the real long term rate would rise with monetary stimulus (due to higher expected real growth resulting from reflation.)

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