Temporary Monetary Stimulus Is Unlikely to Offer Many Benefits


I’ve read Joe Stiglitz’s Q&A with Ezra Klein on quantitative easing thrice now and I can’t quite decide if my view is that I agree with him or disagree. I suppose I just wouldn’t put the points the way Stiglitz does. But I agree with this: “People recognize that this is a temporary intervention and the government won’t maintain it for long, so they won’t run to spend that money.”

Temporary monetary interventions don’t really do anything. Which I see less as a reason to oppose quantitative easing than as a reason to urge permanent intervention.

Paul Krugman wrote the best piece on this twelve years ago long before the current crisis arose:

Of course the Bank of Japan does not announce whether its changes in the monetary base are permanent or temporary. But we may argue that private actors view its actions as temporary, because they believe that the central bank is committed to price stability as a long-run goal. And that is why monetary policy is ineffective! Japan has been unable to get its economy moving precisely because the market regards the central bank as being responsible, and expects it to rein in the money supply if the price level starts to rise.

The way to make monetary policy effective, then, is for the central bank to credibly promise to be irresponsible – to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs.

This sounds funny as well as perverse. Bear in mind, however, that the basic premise – that even a zero nominal interest rate is not enough to produce sufficient aggregate demand – is not hypothetical: it is a simple fact about Japan right now. Unless one can make a convincing case that structural reform or fiscal expansion will provide the necessary demand, the only way to expand the economy is to reduce the real interest rate; and the only way to do that is to create expectations of inflation.

That was right then and it’s right today. And if it’s deemed to be difficult, in practice, for a bunch of sober-minded central bankers to commit themselves to higher inflation then they need to throw a crackpot blogger onto the FOMC. Someone with a track record of urging drastic action and a more rapid increase in the inflation rate. Either that or they need to adopt a level-targeting doctrine. Either way, the point is that it’s possible to get the job done but you have to face the problem squarely and not do the stop/start thing where you pull back from expansion the moment it seems to be working. As Stiglitz says, you can’t really trick people like that.