Read it at New Economic Perspectives
Krugman’s Flashing Neon Sign
by Scott Fullwiler | Assoc. Prof., Wartburg College
Things I Should Not Be Wasting Time On
by Paul Krugman | Professor, Princeton University
This has legs. New Keynesian Krugman is in for the battle of life now with the Post Keynesian monetary economists on his case. This is an old feud among Keynesians going back to John Hicks and Paul Samuelson's "bastardization" of Keynes in PK eyes, and now it is payback time. Expect more heat as the proponents of endogeneity attempt to administer the coup de grace to monetarism's exogenous quantity theory. But the monetarists are not going down without putting up a fierce fight.
UPDATE: Scott informs me that he has responded to Krugman's riposte at the beginning of the post cited above. Here it is for convenience.
UPDATE: Scott informs me that he has responded to Krugman's riposte at the beginning of the post cited above. Here it is for convenience.
Update: Paul Krugman has posted a reply to this post that is a straw man. He and Nick Rowe are viewing this all through the lens of the old Monetarist/Keynesian debates in which there was a choice b/n interest rate targets and monetary aggregate targets; the Monetarist critique assumed the Keynesians were going to keep interest rates at the same level forever and not change them. Once John Taylor came up with his “rule,” everyone agreed an interest rate target could work.
What we are talking about here is operational tactics–the CB can only target an interest rate. It cannot target a reserve balances or the monetary base directly. But that is different from strategy–that is, WHERE the CB puts its target and WHEN it chooses to change the target. There is NOTHING in anything I’ve ever said or anything any PK’er, MMT’er, etc., has ever said that suggests the CB can’t set the target wherever it wants whenever it wants. The point is that whatever the target is, THAT is what its daily operations defend directly, not a monetary aggregate, not the monetary base, not reserve balances. There is nothing in anything I’ve said that would preclude the CB from running a Taylor’s Rule type strategy, for instance, that responds at any point in time endogenously to the state of the economy. That is, the target rate is an exogenous control variable (i.e., it is necessarily set by the CB) that it sets endogenously in response to economic events.
15 comments:
Tom - see my e-mail. See particularly Travis Fast's article on his blog - Relentlessly Progressive Political economy
Also, Lars Syll has a few articles on this issue as well.
Here is the paper that pretty much proves Scott and Steve correct.
http://www.apeaweb.org/confer/hk10/papers/cao_yong.pdf
From the conclusion:
"Having examined the determinants of money multiplier and money base, this study shows that the changes of money multiplier and money base have been largely determined by the changes of k-ratio, excess reserves in the commercial banks and foreign exchange reserve. As these variables are market-driven and beyond the control from the PBC, the money supply in China has been largely endogenous. The Chinese
monetary authority, the PBC, has tried to use conventional instruments such as to increase reserve requirement ratio and unconventional instruments such as to issue PBC bill and note in the effort in containing the growth of money supply. But these PBC’s
efforts could only have played a marginal role. Ultimately, it is those market-driven variables which have played the deterministic role in pushing the aggressive money
supply growth in China."
Krugman's denouement.
"See particularly Travis Fast's article on his blog - Relentlessly Progressive Political economy"
Thanks, Clonal. Saw your email and put up the post.
Thanks, Tom. I've posted a brief update to the original that responds to Krugman's straw man, fyi.
Thanks, Scott. Updated here.
Is it just me but when Chris Cook chimes in im left scratching my head feeling like an idiot?
Krugman's response to Fulwiler is quite unseemly. He appears to realise he is wrong but tries to make it look as though he isn't. I'll be interested to see if he tries to shut this one down or continues the back and forth. I hope it's the latter.
So now Krugman moves on to "why do operations matter, anyway?" as if knowing why QE doesn't work or why deficits don't cause interest rates to rise isn't important.
Krugman also ignores the other thing that setting interest rates do. Set interest income for savers.
Mosler makes this point over and over again.
> What we are talking about here is operational tactics–the CB can only target an interest rate. It cannot target a reserve balances or the monetary base directly.
Can someone explain the part that comes after "It cannot..." Why can't the CB target reserves down to the dollar? Aren't they in charge of the spreadsheet that keeps track of these reserves?
It seems the CB could target *either* some interest rate or some quantity. MMTers are just thinking that they've chosen an interest rate.
marris, the CB is forced to provide reserves to clear unless it chooses to crash the payment system, and banks get to choose how much credit money they advance. Not much of a choice there. The cb tries to influence the creation of credit money by increasing the interest rate and making credit money more expensive. But about the only area of the economy that that sensitive to interest rate changes is housing. So the CB is really operating through the housing channel using interest rate adjustment. To affect other channels, the interest rate adjustment has to be large — Volcker-like — and ordinarily the Fed moves the rate in small increments that chiefly affect mortgage rates.
But that means the statement "It cannot target a reserve balances or the monetary base directly." is false. The fact that the Fed *could* bring the payment system to a halt implies that the Fed *can* control the quantity of reserves.
Perhaps the statement can be fixed if it prefixed with "Now unless the Fed wants prevent payments from flowing, it cannot..."
Even then, I think it would be wrong. Proving it wrong just requires some creativity. The Fed could probably take the effected institution into receivership, push out payments today and note that it will drain these reserves tomorrow... in this model, we accept that the Fed *should not* freeze the reserve quantity instantaneously, but admit that it *could* nudge reserves toward a particular target.
I guess the conversation then just becomes arguing over what we *think* the Fed will or will not do, even though we all admit that the space of *possible* actions is quite large.
marris, this is the liquidity problem. A credit system is liquidity dependent. It can handle adjustment of price but it cannot handle illiquidity without collapsing on itself. That's what the GFC was about.
Think of the US as a cash only system and the government doesn't provide enough cash at some point to handle desired transactions and saving.
Under the present system reserves are to banks what cash is to people in a cash only system.
While there have been quantity system in the past, experience with them shows that price is the tool to use instead if the goal is an economy adjusting to its potential without having to be concerned with funding from a fixed supply. It's not impossible to have a quantity based system, just not anything like the present system in which demand is drawn forward with IOU's.
In fact, many, e.g., Austrians, would prefer to see a quantity system based on gold as money in the belief that it would be more stable than a credit-based system. Well, there are trade-offs.
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