I don’t think there really is such a thing as monetary policy any more. Money and government bonds are perfect substitutes. At that point, central bank interest rate setting is the same thing as if the Treasury simply decreed the rate it will pay on government debt. When (if) the Fed raises interest on reserves, and Treasury interest goes up similarly, it will be just as if the Treasury announced it will pay 1% on short term debt.
Read the whole post.
John Taylor, who claims to be the intellectual heir of Milton Friedman, says that the Fed’s big mistake was loose monetary policy prior to the financial crisis and the Fed is too loose now.
Scott Sumner, who claims to be the intellectual heir of Milton Friedman, says that the Fed’s big mistake was too tight monetary policy during the financial crisis and that the Fed is too tight now.
John Cochrane, who claims to be the intellectual heir of Milton Friedman, seems to be saying that these days the Fed is impotent.
I do not claim to be the intellectual heir of Milton Friedman. My views happen to be closest to Cochrane’s.
Maybe all the views can be roughly correct, which may qualify as a 4th view. The Fed doesn’t behave as if they think money is neutral.
Leaving aside whether the Fed is impotent, then why are interest rates at historical lows and the CPI since 2010 has the most stable in US history?
A dead hospital patient could be said to be stable, also.
The fact that interest and inflation rates are historically low all across the hard-money developed world should tell us that the real driver of this phenomenon is something other than the activity of several less-than-perfectly-coordinated Central Banks (The Fed, Bank of England, Bank of Japan, Euro. Central Bank, etc.).
So a reasonable place to look for explanation is in the category of circumstances which are common to all those places.
And I’m guessing it’s mostly two of those common things:
1. The Demographic Transition – most developed countries have a big baby boom bulge, and now aren’t having many kids. The numbers differ slightly, some countries are ahead of others, but the similarities in the overall trend are greater than the differences. Growing aggregate demand is population growth plus per capita growth, and the population growth part has imploded for many places.
2. Technological progress – this is a longer explanation (believe me) but the bottom line of the analysis is that commercial demand for investment capital in the developed world has also imploded because most of the labor force isn’t doing work that can be made more productive by augmenting them with even more physical or technological capital, and every automation breakthrough just exacerbates this problem.
This model makes a prediction that nominal rates will stay near the depreciation+inflation rate for a long time.
Money and bills are equivalent but money and 30 year bonds, not so much. If too loose, where is the inflation? If too tight, sticky prices offer an explanation.
Not to mention, if ineffective, how could it be either, rather than irrelevant, and if irrelevant it doesn’t matter if they do an order of magnitude more.
Isn’t Cochrane’s view just the logical culmination of Taylor’s? I don’t see why they’d be mutually exclusive in any way.
That his views are endorsed by someone who rejects the Quantity Theory of Money really weakens Cochrane’s claim to being intellectual heir of Milton Friedman.
Well, Scott Sumner believes that the Quantity Theory of Money and the Efficient Markets Hypothesis are mostly true, and that monetary policy should NOT be conducted through interest rate targeting. The latter because interest rates are not ‘the price(s) of money’.
All of which are clearly beliefs that Milton Friedman espoused on numerous occasions.
Friedman’s legacy is his lucid arguments on the benefits of economic freedom, which changed the world, not the quantity theory of money, which flopped first as a practical guide to monetary policy in the ‘80s, then as an analytical framework for understanding EMs in the ‘90s-‘00s, and finally as a goldbug critique of QE in the ‘10s.
Cochrane is mostly spot on in this post. Setting IOR directly determines how much interest Treasury pays on debt owned by the Fed, since Fed payment of profits to Treasury amounts to basically the coupons on the Fed’s holdings of Treasurys less the IOR on the corresponding reserves. And of course OR is a big factor in market rates of Treasurys held outside the federal government and federal reserve. Especially at the short end of up to 3 years, which is about half the total.
But I’d say that’s still a monetary policy. Just because the lever can’t be moved much further in the low-interest direction doesn’t mean the lever has no power.
And generally Cochrane is all over the map. Elsewhere he argues that raising interest rates paid on currency and short Treasurys increases inflation. Which is a call for this sort of monetary policy to be used, and a (bizarre) claim it would have the opposite from expected result.