Not long ago, Brad and I had a Twitter discussion about monetary policy that I annotated in
I am glad to see that in his quest for more stimulus, Brad has turned his attention back to monetary policy as well as continuing to argue for fiscal stimulus.
I found his categorization of the views of those who attend the Federal Open Market Committee (FOMC) meetings and vote on monetary policy (some only on a rotating basis) especially useful.
In Brad’s discussion of what he thinks the Fed should do, I would like to see him more clearly address the question I posed to Scott Sumner: “Should the Fed Promise to Do the Wrong Thing in the Future to Have the Right Effect Now?” I give my summary of Scott’s answer in Wallace Neutrality and Ricardian Neutrality. If Wallace neutrality is an accurate description of the real world, then the only way the Fed can stimulate the economy now is by promising to overstimulate it in the future. Scott joins me in rejecting Wallace neutrality as an accurate description of the real world. Brad’s views are not clear.
One thing that may confuse the issue is that one would expect purchases of an asset to have less effect on the asset’s interest rate and therefore on the economy the closer the interest rate is to zero to begin with. Since the Fed does not view itself as having the legal authority to purchase assets with interest rates still far above zero such as index funds of corporate stocks and bonds, it is not currently allowed to get the maximum mileage from the departures from Wallace neutrality that I believe exist. (I need to more systematically discuss the pluses and minuses of different assets as a target for a print money and buy assets strategy sometime soon. Foreign assets—which the Fed is legally permitted to buy—present the most complex case.)
In mentioning Wallace neutrality, it now gives me great pleasure to be able to give a link to the wikipedia article on Wallace neutrality initiated as a public service project of the community of supplysideliberal.com readers and brought into existence by Fudong Zhang and revised by Matt “DocStocks.”
By the way, on fiscal policy, given that Brad is favorable in principle to my Federal Lines of Credit proposal, I wish that in his frequent posts on the need for fiscal stimulus, he frequently mentioned the possibility of Federal Lines of Credit as a reason why concerns about the national debt should not stop us from pursuing further fiscal stimulus.