Scott Sumner must be smiling. At the recent meeting at Jackson Hole a paper was presented that found, essentially, that when the Fed funds rate is near zero quantitative easing (the Fed tactic of buying long-dated bonds and mortgage-backed securities) doesn’t do much for the real economy while verbal commitments by central banks to specific goals or outcomes AKA “nominal GDP targeting” do. There’s a lengthy post summarizing the paper here at Business Insider.
So the author strings together a series of anecdotes, asserts correlation, and that changes economics forever? Here’s his evidence:
“The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of a percentage point to 1/4 per cent, which the Bank judges to be the effective lower bound for that rate…. With monetary policy now operating at the effective lower bound for the overnight policy rate, it is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities. Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.”
The target overnight rate remained at the current level because the central bank stands ready to increase or decrease liquidity at a moment’s notice. If reserves drop the central banks adds more and if they rise, it swaps them for bonds. The author asserts the target rate was maintained because the CB offered “guidance”, but according to his own argument the Fed isn’t offering guidance, yet the target rate is maintained nevertheless.
I don’t know what to say about the paper other than it’s stupid. If this is what it takes to be a renowned economists then it’s no wonder we’re in trouble.
So does MMT deal at all with expectations Ben?