Nick apparently conflates monetary policy with monetary operations. No one doubts or denies that the cb sets its target rate and changes it as deemed appropriate with a view to monetary policy, and in the US, the Fed's mandate is to maintain production consistent with full employment and price stability. So the Fed does have explicit economic criteria for setting monetary policy.
If this is what one means in holding that monetary policy is "endogenous," OK. But that is using "endogenous" in a different sense than Post Keynesians use it. Post Keynesians hold that the interest rate is exogenous in that it is set by the central bank as monopoly supplier of reserves rather than as a market rate. Of course, change in the economy influence changes in the rate. But what adjustment in the rate actually do and how they do it is non-trivial, and there is apparently considerable disagreement over this.
Regardless of the monetary policy it chooses to implement, the cb uses monetary operations as tools. These are the means of implementing monetary policy to achieve policy goals. The principal tool is price — the overnight interest rate. The cb sets price and lets quantity float within the band that achieves this price while settling all accounts seamlessly. That is how a monopolist acts, and the cb holds a monopoly over reserves and access to them since it owns and controls the spreadsheet only which they alone reside.
The cb conducts monetary policy by setting the target rate exogenously, although obviously not arbitrarily. No one ever claimed that. The target rate changes with economic conditions, and many factors may be involved in establishing such conditions. Central banks maintain elaborate forecasting models for this purpose.
The cb uses monetary operations to implement monetary policy. Chief among these operations is setting the overnight rate and managing reserve quantity to hit its target through OMO. That is to say, if the cb permits reserve quantity to expand without limit, then the overnight rate will go to zero. So the cb has to limit quantity available in order to hit the target, since insufficient reserves will drive up the rate and excess reserves will drive it down.
Issuance of government securities is also an interest rate management operation in that this alters the composition and term of government liabilities, draining excess reserves to reduce the need for OMO intervention.
If it chose, the cb could simply pay IOR at the target and then excess reserves would become irrelevant. Or government could eschew monetary policy in favor of fiscal policy and set the overnight rate to zero.
"Monetary policy is just one damn interest rate after another"
by Nick Rowe
There are always interesting comments at Nick's place and he is good at responding to them.
9 comments:
Their arguments are getting really silly Tom. I can't belive krugman is in the same boat. I had a little more respect for him.
Bottom line, we can use different word but the meaning is the same, Interest rate is exogenous, no IS-LM. These guys sound to me almost like MMR guys now.
Keep up the good work Tom.
"If it chose, the cb could simply pay IOR at the target and then excess reserves would become irrelevant. Or government could eschew monetary policy in favor or fiscal policy and set the overnight rate to zero."
And that's the key different with the reserves 'endogenous' argument.
There is nobody else to add reserves to the system other than the central bank. If you want to maintain the payment system with a credit money system in a floating exchange rate setup then the CB *must* supply reserves on demand or the whole thing falls apart.
Whereas for the target for interest rates to be 'endogenous' you must close off the other options - either with legislation or ideological blinkers.
But by adopting an MMT style fiscal policy you can just set the interest rate where it needs to be and leave it there. And instead adjust the economy dynamically via enhanced automatic stabilisers.
Rowe's missing the distinction between tactics and strategy. Krugman actually got that part after I posted my update, but then suggested that given strategy, understanding tactics/operations is unimportant.
Tom: Thanks!
"Post Keynesians hold that the interest rate is exogenous in that it is set by the central bank as monopoly supplier of reserves rather than as a market rate."
If the central bank could *permanently* set the interest rate wherever it felt like setting it, without any regard for what is happening in the economy, I could see your point.
A New Keynesian (or monetarist of any sort) would disagree. We would say that natural rate of interest is a market rate, and that the central bank cannot set the interest rate where it likes, without reference to the natural rate, without destroying the monetary system through hyperinflation or deflation.
STF: "Rowe's missing the distinction between tactics and strategy."
I thought that was *my* point?? I thought that *I* was the one arguing that those who say the central bank sets a rate of interest were missing the distinction between tactics and strategy?
Nick, thanks for clarifying.
I assume you know that Warren Mosler recommends setting the interest rate to zero permanently and using fiscal as the chief policy tool, together with the reforms he has proposed to change institutional arrangements that are leading to financial instability.
So it looks like a fundamental disagreement here, at least with Warren. I believe that Scott would still use monetary policy based on adjusting the rate to economic conditions, while making fiscal the principal policy tool.
Nick,
The point is WE ARE NOT SAYING THAT, so you're building a straw man.
We are saying:
Tactics--the CB sets an interest rate target necessarily in terms of its direct or operating target. The target for this cannot be a reserve or monetary base target, at least directly.
Strategy--where the CB sets the interest rate target and when it decides to change it are based upon the CBs decisions regarding how to respond to the state of the economy or its projected state of the economy, etc. The tactics above are completely consistent with, say, Taylor's Rule.
So, who is it that you are criticizing????? I don't know of ANYONE who makes the argument you are criticizing.
Tom,
Yes, there is disagreement on how to decide where to set the target rate and whether to change it. But the debate was over tactics--are banks constrained by reserves, monetary base, etc?
That's a matter of tactics, since tactically the Fed must supply the reserve balances and currency on demand. Strategically the Fed can alter the target to change these indirectly, but that's not what the debate was about. I was already clear on that point in my post, so it can only be that Krugman/Rowe didn't actually read very carefully. Bringing up strategy in relation to my post is a straw man. Regardless of our differences over strategy, the necessities of the tactics remain.
In other words, the "short run," "medium run," or "what happens after 6 weeks," etc. points Rowe and Krugman made are completely irrelevant and they've not understood what we're talking about fundamentally IN THIS PARTICULAR DEBATE.
Post a Comment