I really wish Paul Krugman would not be so be tepid in his pronouncements of the efficacy of monetary policy. His recent articles
on what monetary policy can do have been less than inspiring and leave great uncertainty in the mind of the reader as to whether the Fed can actually do anything. Here is a prime example
The zero lower bound on short rates really does matter... So it’s not safe to assume that the Fed can, for example, hit any target for nominal GDP that it chooses...The Fed deserves to be chastised for not doing more...
So, on one hand, the Fed needs to be doing more, but on the other hand we don't really know whether it will matter. I am no expert on sales, but I do know a bad sales pitch when I see one and this is one of them. Wishy-washy calls for more Fed action like the above will not convince anyone, let alone the Fed. Now readers of this blog know that unlike Krugman I do believe
the Fed can, for the most part, hit any nominal GDP target that it wants if it so desired. The reasons for this belief are threefold:
- Ben Bernanke and other fed officials believe that the Fed could do more;
- monetary policy was shown to be highly effective in the early-to-mid 1930s, a far worse economic environment than today; and
- many top economists believe the Fed could do more. One of these top economists, who happened to win the Nobel Prize for economics, went so far as to argue monetary policy and not fiscal policy is the key to economic recovery in a depressed economy:
The first-best answer — that is, the answer that economic models, like my old Japan’s trap analysis, suggest would be optimal — would be to credibly commit to higher inflation, so as to reduce real interest rates.
Yes this is Paul Krugman and yes, he is arguing that the first best solution to a depressed economy is more active monetary policy. Now he does go on to note in the same piece that the key here is for the central bank to permanently alter inflationary expectations and doing so may be challenging in practice. Krugman, however, is doing nothing to promote this approach by having columns drenched with ambivalence about the efficacy of monetary policy. If one wants to sell something, one needs to convince potential buyers in what they are selling. Being ambivalent about your product will not do that.