Monetary Lessons from the Not-So-Great Depression - The Real Problem was Nominal

Monetary Lessons from the Not-So-Great Depression (Cato Unbound Book 92009)

Jeffrey Rogers Hummel, Scott Sumner, George A. Selgin, James D. Hamilton, and Will Wilkinson

Last accessed on Monday September 3, 2018

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The Real Problem was Nominal
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resources of monetary policy were not exhausted,
Note:PUNTO DI PARTENZA

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Sumner maintains that monetary policy in the run-up to the finacial crisis was not highly expansionary,
Note:CONTRO L OPINIONE GENERALE

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important flaws in modern economic theory.
Note:OPINIONE COMUNE DOPO LA CRISI

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it appeared as if modern macro offered no solutions. Thus policymakers turned in desperation to old-fashioned Keynesian fiscal stimulus,
Note:RITORNO AD IDEE GIÀ SCREDITATE NEGLI ANNI OTTANTA

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first recognizing that the proximate cause of the crash was not a financial crisis, but rather a steep decline in nominal spending.
Note:PRIMA COSA DA FARE

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a failure of monetary policy.
Note:DI FATTO

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an intellectual failure by well-meaning public servants and the academic economists who advise them.
Note:CHI HA FALLITO

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crisis resulted not from a failure of modern macroeconomics, but rather a failure to take seriously some of the most promising recent developments in the field.
Note:SINTESI

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A Very Brief History of Monetary Economics
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the quantity theory of money,
Note:1700… DAVID HUME

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Hume even understood that a change in the velocity of money had an identical effect to a change in the money supply:
Note:VELOCITÀ

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(M*V = P*Y),
Note:4 VARIABILI

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In the long run the effects of diminished nominal spending show up in the form of lower prices, but in the short run output would also fall.
Note:L AGGIUSTAMENTO

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Hume had the answer
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but Milton Friedman made a similar observation in 1975 regarding the Phillips Curve:
Note:ANCHE MF ERA ARRIVATO

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Today we think in terms of unanticipated changes,
Note:DOVE ABBIAMO SUPERATO F.

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Between the early 1990s and 2007, NGDP grew at just over five percent per year.
Note:ESEMPIO

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the decline in NGDP during 2009 is likely to be the steepest since 1938.
Note:NDGO 2009

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This produced what may end up being the deepest and most prolonged recession since 1938.
Note:CONSEGUENZA

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The “real problem” was obviously the financial crisis, and NGDP fell as a consequence.
Note:L OBIEZIONE A QS RICOSTRUZIONE

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Monetary policy was obviously highly expansionary,

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ALTRA CREDENZA DIFFUSA

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monetary policy was not “easy” but rather was highly contractionary in the only sense that matters, that is, relative to the stance expected to hit the Fed’s implicit nominal targets.
Note:XCHÈ LA POLITICA MONETARIA FU RESTRITTIVA

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Wicksell argued that central banks should adjust the interest rate on short-term loans as needed to stabilize the price level.
Note:TRA HUME E FRIEDMAN

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in a depressed economy with falling prices the natural rate might become negative.
Note:IL CONTRIBUTO DI KEYNES

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He called this scenario a “liquidity trap.”
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The monetarists recommend “quantitative easing,” or injecting more cash into the economy than the public wishes to hold.
Note:LA RICETTA MONETARISTA X USCIRE DALLA TRAPPOLA

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it is always possible to produce inflation by lowering the price of money either in terms of a commodity like gold or in terms of foreign exchange. This was the approach used by FDR in 1933,
Note:APPROCCIO ALTERNATIVO DI VFDR

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Much of recent macro theory has focused on showing how and why monetary policy can be highly effective in a liquidity trap. Thus I was quite surprised to observe the general sense of powerlessness
Note:DI STUCCO

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almost all of the attention was focused on fiscal stimulus.
Note:PURTROPPO

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Frederic Mishkin says: “Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.”
Note:FM

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Misdiagnosing the Stance of Monetary policy
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Twentieth-century macroeconomics reached its nadir in 1938,
Note:QUANDO IL ZERO BOUND FECE DISPERARE SULLA POLITICA MONETARIA

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Keynes had argued that monetary policy could only impact demand by changing interest rates,
Note:LA CREDENZA DI ALLORA

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Joan Robinson drew the logical implication that easy money couldn’t possibly have caused the German hyperinflation, as interest rates were not particularly low.
Note:EFFETTI DELLERRORE KEYNESIANO

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interest rate is a good indicator of the stance of monetary policy.
Note:LA CREDENZA IN ALTRE PAROLE

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The second most common rationale for believing money was “easy” was to point to the huge expansion of the monetary base that began in the fall of 2008.
Note:ANCHE LA BASE MONETARIA NN È N BUON ONDICATORE

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Friedman and Schwartz showed that money was very tight during the early 1930s, and yet the monetary base rose sharply during that period.
Note:ESEMPIO STORICO

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paying interest on reserves was called a “confession of contractionary intent”
Note:CONFESSIONE

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the broader aggregates
Note:ALTRO INDICATORE NN VALIDO

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false alarms about high inflation.
Note:SE GUARDIAMO ALL AGGREGATO....UN PUNTO DEBOLE DEL MONETARISMO TRADIZIONALE

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Late in his life even Milton Friedman suggested that it might be better for the Fed to target inflation forecasts.
Note:IL CAMBIO DI MF

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all our models, data, and analysis and experience for the last 40 years say fiscal stimulus doesn’t work,
Note:COCHRAN SUL FISCAL STIMULUS

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How can a scientist “believe” something different than what he or she spends a career writing and teaching?
Note:MISTERO

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the market expectation for inflation and NGDP growth over the following 12 months had fallen far below any plausible estimate of the Fed’s implicit target.
Note:TUTTI DISTRATTI DAL CHE FARE CON LE BANCHE

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Many economists associate a loss of monetary credibility with high inflation, not excessively low inflation.
Note:ADDIRITTURA

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many economists assumed that the financial crisis was causing the decline in aggregate demand, whereas the reverse was more nearly true.

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ALTRO DIVERSIVO

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monetary policy almost never appears to be the cause of deflation
Note:PURTROPPO

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A fourth problem was that many economists focused on inflation, whereas NGDP growth is a far more revealing indicator of deflationary policies.
Note:ALTRO PROBLEMA

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because many wages and prices are very sticky, a deflationary monetary policy may affect output
Note:IL DRAMMA DELLA DEFLAZIONE

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In my view, the expected growth rate in NGDP is the best indicator of whether monetary policy is too loose or too tight.
Note:ESPANSIVA O RESTROTTIVA

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The most devastating demand shocks are those that change the expected trajectory of NGDP and inflation many years out into the future.
Note:È SUCCESSO NEL 1929 E NEL 2008

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all sorts of indicators were signaling that money was too tight well before the failure of Lehman in mid-September.
Note:2008

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Even in normal times going from five percent NGDP growth to a nearly five percent rate of decline would place a severe burden on banks.
Note:ALLARME ROSSO

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Targeting the Forecast
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Lars Svensson has advocated a policy of targeting the forecast
Note:LA PEOPOSTA

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Once one starts to think of monetary policy this way, any other policy seems unacceptable.
Note:L IDEALE

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Ben Bernanke also seemed to find the logic of Svensson’s idea to be quite appealing,
Note:D ALTRONDE

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it became apparent that the Fed’s forecast was well below any plausible target.
Note:MA LA FED NN FA PREVISIONI

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In the standard new Keynesian model, where the central bank targets the inflation rate, there is no role for fiscal policy
Note:NEW K

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Hetzel argued that the Fed was frightened by the high inflation rates in the “headline CPI”
Note:LE PAURE

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Nevertheless, many monetarist insights became a part of the consensus new Keynesian model. Some of these were very valuable, ideas such as the importance of expectations, and also that monetary policy was more effective than fiscal policy.
Note:MONETARISMO => NK

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the belief that any large increase in the money supply must inevitably be followed by high inflation.
Note:MA ECCO COSA FREGA MOLTI EX MONETARISTI

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despite the fact that prices have trended downward in Japan since 1994, despite huge monetary injections.
Note:NONOSTANTE UNA LEZIONE STORICA

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widespread belief in a mysterious “long and variable lags”
Note:PAURA DEL LAG

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Modern macro theory suggests that what really matters is not a change in today’s money supply, but rather a change in the expected future path of money.
Note:CENTRALITÀ ASPETTATIVE

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A sharp devaluation of the dollar would not have been appropriate in the second half of 2008, as much of the world faced the same problems. But we did need some type of credible policy of price-level or NGDP targeting.
Note:FORSE NN LA SVALUTAZIONE

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In essence, this would mean letting the market determine the monetary base and the level of interest rates expected to lead to five-percent NGDP growth.
Note:PREDICTION MARKET

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“the wisdom of the crowds.”
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market forecast turned out to be far more accurate than the Fed’s forecast,
Note:VUONE PRESTAZIONI

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Let a Thousand Models Bloom.”
Note:OGNUNO SIA LIBERO DI PREVEDERE

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Futures targeting will not happen in the near future. But this thought experiment provides insights into what sort of policy would have worked last fall.

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AD OGNI MODO

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recall the stabilizing speculation that occurs under a credible currency peg.
Note:RICORDATE COME LA SPECULAZIONE AIUTI LA BANCA CENTRALE IMPEGNATA SULLA PARITÀ

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Concluding Remarks
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a lack of money was causing or worsening many of our most pressing problems.
Note:LA FISSA DI SCOTT

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It is especially important for free-market economists to never lose sight of the harm that can be done by deflationary monetary policies.
Note:X GLI AMANTI DEL MERCATO

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public will end up blaming the free-market system.
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Monetary policy is incredibly counterintuitive, with tight money often accompanied by low interest rates
Note:PURTROPPO

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the public failed to see the role played by the Fed in the Great Depression, and instead blamed laissez-faire
Note:L EQUIVOCO DEL PASSATO

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Only when Friedman and Schwartz showed that the Depression was a failure of government monetary policy, not laissez-faire, was free market ideology able to regain real intellectual respectability.
I SALVATORI DELLA PATRIA @@@@@@@