Here it is. But I STILL don’t think he has really answered the point that Mankiw made in his post, and John Cochrane makes in discussion with him: that the Fed’s power is just not that great at the zero bound, and if Sumner is reliant on expectations, if people don’t believe it has that power, then it doesn’t.  I would like to ask him that since

a) our Mervyn King is so quick to reassert his commitment to low and stable inflation

b) we have low and stable inflation

c) the public’s expectations have shown more signs of adaptive expectations than rational (see Bank of England inflation surveys last fall)

d) the markets in the UK for this future variable don’t seem to respond much to the Bank increasing its balance sheet by ten times

How can anyone believe that the Bank of England has the ability to “target future growth”?  For me, the UK situation seems perfectly suited to Keynes’ diagnosis.  Monetary policy levers are ineffective (the mechanism by which Congdon seems to think high asset prices from QE translate into high demand is crazy.  Be careful before endorsing his views, Professor Sumner.)

Something is needed to turn the money created into actual economic demand, and Central Bank credibly targetting Future Growth ain’t it.  Particularly if you have a central banker like Mervyn King, terrified of being called an inflationist (and who would blame him?)  So government adding net demand to the economy is a good policy – for now.

Look at this graph of the UK’s evolving 3 year inflation expectations, and tell me if you think that QE has worked much through expectations

Infl Expectations

My thoughts on quantitative easing, to be brief, are these.  There are three types of mechanism by which the Bank hopes that it might influence aggregate demand.

1. Traditional monetary methods – influencing future interest rates, increasing liquidity.  But these become relatively inert when (a) inflation is very low (b) the credit channel is &&*&ed and (c) the depression is worldwide (leaving the fx rate unhelpful)

2. Expectations.  These are scuppered by (a) public and market distrust or confusion about what QE is actually about (b) central bank fears of losing inflation fighting credibility and (c) in the UK at least our inflation rate is so close to the “expected” rate that this provides little stimulus.  If our deflation was minus 5%, then I could see a commitment to 2% inflation firing people up

3. Quasi-fiscal effects.  By this I mean: lightening the government’s debt burden; creating extra profits for banks; creating asset bubbles that boost particular constrained sections of society.   These MAY work.  But it is dishonest and undemocratic for central bankers to be using fiscal methods for boosting the economy, and calling it a smooth extension of their previous light touch monetary regime.

QE may work, but in a chaotic way.  And I think Professor Sumner’s cool confidence about central banks being able to target future growth in a happy expectations-equilibrium now looks a little like arrogance.  I certainly don’t think that Roosevelt getting the US off gold in 1933 is enough of a proof that it can always work.

I never know which Sumner post to point to as a good summary of his views, but I guess this one will do.

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2 thoughts on “Scott Sumner has posted another Opus

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