In a previous post, I tried to translate Paul Krugman's critique of Steve Williamson from the language of Keynesianism (interest rates) into the language of monetarism (base money.) The basic insight was that when one thinks of wheelbarrows full of cash, one thinks of two very different situations; banks in Japan (and more recently the U.S.) engorged with reserves, and of course the German / Zimbabwe hyperinflations. And these two examples (which are polar opposites) illustrate how careful one must be in drawing causal connections between changes in the monetary base and changes in the price level. I thought that was Krugman's point, but given my weak grasp of theory, I had a lot of doubt. Now that Krugman himself (with David Andolfatto) have switched into the language of monetarism, I'm much more confident my previous post was addressing his point, in an oblique way.
But I'd still like confirmation from someone with a higher IQ than me! Noah??
Here's Krugman (and Andolfatto):
So, here's how Andolfatto describes Williamson's point:
Evidently, one of the effects of QE (in the model) is to increase the real stock of currency held by the private sector, and agents require an increase in currency's rate of return (a fall in the inflation rate) to induce them to hold more currency. (Remember that the results are all contingent on the way monetary and fiscal policy are modeled.)
OK, so "agents require" a fall in the inflation rate to induce them to hold more currency. How does this requirement translate into an incentive for producers of goods and services - remember, we're talking about stuff going on in the real economy - to raise prices less or cut them? Don't retreat behind a screen of math - tell me a story.
PS. I don't have any views on Williamson's model as my math is so weak it would take me a month to have an intelligent opinion. I disagree with his empirical claim (as does David Beckworth), but that's a different issue.
PPS. I do find the debate entertaining. Kocherlakota's faux pas a few years back was the initial skirmish; this is the full blown battle. Kocherlakota himself seems to have switched sides. Then there are people like Tyler Cowen and Noah Smith, who think Williamson is being criticized unfairly on theoretical grounds, but have some doubts about his empirical claims (at least that's how I read Tyler and Noah.) Sorry to be such a wimp on this, but I'd rather not strongly defend a position unless I have a high level of confidence.
HT: Mark Sadowski