Paul Krugman keeps a steady flow of thoughts on the problem of the Zero bound for monetary policy.   The dream for monetarists is that money policy can do all the heavy lifting of restoring aggregate demand in a depressed economy, just by attempting ever more quantitative easing. This means none of that dirty and debt-full fiscal stimulus, which ends up with (warning:  melodramatic Tory formulation about to come) “children being born saddled in debt.”

But unfortunately the size needed and the reliability of pumping more liquidity into the economy in a zero-rate environment is highly questionable. Krugman writes:

But the available — albeit thin — evidence is that it takes a huge expansion of the Fed’s balance sheet to accomplish as much as would be achieved by a quite modest cut in the Fed funds rate. And the Fed isn’t willing to expand its balance sheet to the $10 trillion or so it would take to be as expansionary as it “should” be given, say, a Taylor rule.

Duncan’s take on UK QE seems similar – not really working, particularly for a period of bank-capital-hoarding-stress.

Whereas the effects of fiscal policy are pretty well known and certain: PK, an advocate, thinks they may well be large enough to pay for the costs.  We have the concept of the multiplier to argue with (check out this list, for example)- you may think them modest, but this is a hell of a lot better developed than the long and variable lags of monetary policy at this point.

You can see how this degenerates into a left-right thing.  From the Left, they like the idea that the government’s spending may be the best way out of the ZLB: that way the government gets to direct spending, and it, of course, uses money for good things not bad things. (for a list, read Brown’s speech yesterday.  All, all of it good, of course). For the right, the opposite. For me, this is maddening.  Post-war showed how the notion of a persistently underinvested economy could be misused by governments endlessly trying to achieve full employment with fiscal boosts.  You get inflation.  But the near-Depression was clearly a very different matter.  It takes judgement – surely that should be what economists are paid for – not just spouting the same dogma all the time?

Now the IMF’s just-released report has scrambled my radar on this topic: apparently it sees the banking sector’s funding gap as proof of the need for more QE.  I am not sure I agree.  If our banks were brilliantly capitalised, they could borrow on the global markets; if not, then no amount of UK-grown QE would reach them, because people (investment funds) would not want to lend it to them just because they have it (then, of course, they’re all HMG-guaranteed).


5 thoughts on “A short one on quantitative easing

  1. In general I do think monetary policy is the best way of managing the macroeconomy.

    I support public spending, in normal circumstances, because of what is can achieve socally rather than economically. Although I also beleive that a fiscal stimulus is sometimes needed – now for example.

    I agree that a fiscal stimulus can be a bad thing in an environment of rising inflation.

    To add to your reading list (actually this should be top of everyone’s reading list):

    Or at least this review:;col1

    ” Tily places most weight on the first prong, the need for low interest rates, in an attempt to restore the impression created by ‘Keynesian’ economics that Keynes was all about countercyclical fiscal policy. This impression has arisen partly, on the monetary side, because money is neutral in the long run in ‘Keynesian’ models, and perhaps because Keynes noted that cyclical fluctuations in the marginal efficiency of capital would be too great to be offset by monetary policy, unaided. Keynes was not advocating countercyclical manipulation of interest rates, Also, on the fiscal side, Keynes was supportive of ‘public works’ as an emergency measure in a crisis but his main objective was the permanent structural change to the economy that could be implemented by his proposal for the ‘socialization’ of investment. The intention was to rescue free enterprise from itself–not to nationalise it. Without a grasp of the principle of effective demand “Keynesians” miss this dimension to Keynes’ policy proposals and to some extent Tily also underestimates this aspect. “

  2. Dear Giles,

    I repeat I am a layperson, but humour me:

    There are some interesting gaps being filled in in your thinking since I last had a moment to look at your blog.

    Well, you are now looking at M4 (or as your friend Duncan suggests M4L) … still vanishing (literally) as continuing deleveraging destroys money and value.

    You have concluded that QE isn’t working – well what could we expect when it operates through banks that need to top up reserves and who know just how risky lending is at the moment, as money supply, demand and values continue to provide them with genuine worries?

    You are looking at pointers from Japan especially around effects on Gov Deficits of spending cuts in economic circumstances similar to ours. (If only Clegg were watching too.)

    So, how do we get out of a deflationary feedback loop/liquidity trap/deleveraging at ground Zero when the fear is not of ‘crowding out’ but of who can ‘fill in’?

    A printing press and a helicopter come to mind.

    What an opportunity to ‘temporarily’ restock the shared equity/affordable housing cupboard. Build some railways and cover the country in WiMax. Pay firms to give young people post school/college ‘on the job training’. Pay for R and D on projects to increase sustainability. (Add your list of infrastructure/investment projects that would build the foundation for future competitiveness and expansion …)

    Use these carrots to put through major reforms on welfare and work and tax reforms.

    This is a once in 100 year chance (last seized by Lloyd-George, Churchill and Co) for some radical and reforming politicians to take a lead.

    Best wishes


  3. Hi Bill, thanks for this

    I don’t think M4 is the proof of it working, or not: see David Miles’ excellent speech. But there is certainly confusion and a lack of unanimity from our policymakers about WHY QE should work, confusion that is affecting its ability to control sentiment.

    I actually have some sympathy with using helicopter money – i.e. actuallly making it permanent. This terrifying paper by Buiter seems to think so too:

    but interestingly puts this under FISCAL policy. Which of course it is.

    My worry, of course, is that this would become the opening for all sorts of schemes. “Printing money and spending it will save the economy” is surely a recipe for disaster in the wrong hands. Note that Japan did a fair amount of spending.


  4. Giles

    Thanks for taking me even slightly seriously.

    I was being a touch provocative with Helio money, which dropped now on to the private sector would still largely be used to reduce debt, and therefore ineffective. But the printing press and Gov Exp need not have that disadvantage.

    The caviat must be that the expenditure is to be capital, and could be used only for the reformation/readministration of Gov Ex towards ‘rebuilding Britain’ for the C21st (interesting to see the poet Armitage(?) in Korea the other night) a similar reformation of tax and welfare and the transformation of the ‘citizen’s’ relationship to the state. That is possible in the first six months of a new Government with a strong mandate from an explicit manifesto.

    My point all along has been that we have to be entirely sure when to take action on the deficit and that that timing is likely to be further down the track that expected, making an opportunity for the above. We would also need help in knowing when the Japan moment has passed.

    This is all relatively counter intuitive to the Westminster mind. There is, though, just one person who could sell this and that is Cable. My hunch is that there is only one person who could convince Cable of this opportunity … and that is you.

    Clegg is a touch young looking to carry an economic message like that, but he could sell the ‘my generation’ ‘new country’ message that would open up. And what a radical/Yellow Book manifesto he’d have.

    If not … the Tories will win and, rather like Heath and Barber in ’70, the Osbourne July 2010 budget and its cuts will stall the recovery. The ‘U’ turn will come a million or so jobs later.

    Have good day


  5. Hi Bill

    Short points:

    1. I don’t think private sector money used to reduce debt is necessarily ineffective – the delveraging is hanging over the economy. Also, dropped on the poor and credit constrained it might well be spent, which is what we need.

    2. I think there are good reasons that people are often sceptical about the ability of government to choose wisely great capital investments. If they were that straightforwardly good for the economy in normal times, then Brown’s great increase in capital investment ought to have yielded a much more productive economy. In a sense he has been “rebuilding Britain” for a while, although genuine property building has lagged owing to deepset NIMBYism

    From the outside it is always possible for lobbyists or similar to dream up ‘obviously great’ things to do with money – (see e.g. the dreadful list from The New Statesman but in practise it can often waste.

    Moreover I am always slightly perturbed that giving people money to spend themselves is regarded as wasteful, as opposed to ‘we know best’

    3. “possible in the first six months of a new Government with a strong mandate from an explicit manifesto”. But around 40% of the country are Conservative, and a good portion of the rest don’t all share the same radical aims. Of course there are always siren voices saying “If only we could be more radical we could get 50% of the vote because our beliefs are the truly good and right ones”. But if you added up all the people who thought that from Right Left and Middle you would get about 250% of the vote . . .

    I sadly think you may be right about the U turn etc

    have a nice w/e

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