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).