I had a little exchange on Twitter yesterday about “monetary policy skeptics” that make me think it’s useful to draw some distinctions.
In particular, I think going forward there’s a need for more clarity between people who are “skeptical” in the sense of “skeptical that monetary policymakers will in fact do what’s necessary” (this is the view of Atrios, Goldman Sachs’ Jan Hatzius, etc.) and “skeptical” in the sense of “skeptical that monetary measures can be made to work” which I believe is the view of Mark Thoma and Dean Baker and others. This is important, among other things, because a lack of clarity on these points sometimes confuses people about what happened in Japan.
I heard from some readers, for example, that the Bank of Japan spent a lot of time trying to create inflation and failed. That’s not really what happened. Instead, the Bank of Japan spent a fair amount of time trying to fight deflation and had limited but real success. They always indicated, however, that they wanted “price stability” not inflation and certainly not catchup level targeting of anything. This kind of stop/start policymaking does exactly what it’s supposed to do—it prevents collapse without being unduly unorthodox—but it can’t really lift the price level or the economy. But that’s not to say policymakers don’t have the ability to say that unorthodox measures will remain in place until full employment resumes. Thus far, in both Japan and the US, they’ve simply chosen not to do so.