Scott Fullwiler on central bank policy, strategy and tactics

Scott posted this comment in clarification at Credit Writedowns.

Scott Fullwiler
3 April 2012 at 17:07

this is a good post, Ed, but this debate is muddled by a lack of definition of terms. More specifically, in the policy sciences there is a distinction made between policy, strategy, and tactics. Similar distinctions are found in business/management literature. Applying this to central banking, it goes a bit like this:

Tactics–can the central bank directly target reserve balances, monetary base, etc. 

Strategy–what sort of rules/discretion balance does the central bank follow in adjusting the target it has set tactically. How often? How big of an adjustment each time? 

By what criteria?

Policy–How does the macroeconomy work and what role can or should the central bank play in stabilizing it?

The debate between Krugman/Keen once it got to issues related to the money multiplier and loanable funds was about tactics–can banks individually or collectively create loans without regard to deposits or reserve balances? This is closely linked to an understanding of what banks are/do and hence Krugman’s view that they didn’t need to be included since inserting them didn’t change how one should view the money multiplier or loanable funds models. This is where I jumped in, because Krugman in my view was completely wrong on these points.

But Krugman’s reply to me, and Rowe’s post, brought in strategy and policy–”the central bank must change the interest rate target by adjusting to events and expectations” which is about how the central bank should adjust its target (strategy) within the context of how the macroeconomy works and interacts with monetary policy (policy). This is a complete tangent and obfuscation of the point that was being discussed. It is not unimportant–to the contrary, obviously—but to throw it in at this point was not helpful.

The MMT view is that we need to understand how the tactics work to inform our strategy and even our understanding of how the economy works. Krugman tried to suggest understanding the tactics is irrelevant to these two. This is a very significant distinction between the approaches.

Further, in MMT, we keep these three (tactics, strategy, policy) separate when we discuss them. Neoclassicals generally don’t–so, when I say the central bank must set an interest rate target (tactics) but can move that target wherever it wants (the possibilities for strategy), Nick says no the cb must set a target that responds to the economy and thus must be endogenous (strategy in the context of view of macroeconomy). We end up talking past each other as I have not invoked yet at all how central banks “should” set strategy with regard to how the macroeconomy works. While we will disagree on the latter, in our view jumping to that without clarifying and setting a common language for tactics and strategy complicates the discussion unnecessarily.

 Note finally that the “short” vs. “medium” horizon distinction Nick makes isn’t at all the same as the tactics vs. strategy distinction. The central bank can change the interest rate target every day or even every minute (possiblities for strategy) but must still defend that target every day, every hour, and every minute (tactics).

Hope that makes some sense. And hopefully none of this is seen as a personal attack on Nick–I agree with you that Nick is one of the most stand-up guys in the blog world and one whose criticisms of my own views are to be taken seriously.

Best,

Scott