Brad Delong kindly posted a long extract from my previous post (about Martin Feldstein) on his blog. The post elicited a longish comment from Robert Waldmann who has been annoyed with me for a while, because, well, because he seem to think that I have an unnatural obsession with monetary policy. Now it’s true that I advocate monetary easing, and think monetary policy, properly administered, could help get our economy moving again, but it’s not as if I have said that fiscal policy can’t work or shouldn’t be tried. So I don’t exactly understand why Waldmann keeps insisting that he won’t calm down. Anyway, let’s have a look at Waldmann’s comment.
After making a number of very cogent criticisms of the Feldstein piece that I criticized, Waldman continues:
On the other hand I also disagree with Glasner. This is the usual and I will not calm down.
Well, you maybe you should reconsider.
Then, quoting from my post on Feldstein,
“does he believe the Fed incapable of causing the price level to increase?” Obviously not (it made no sense to type the question) as he fears higher inflation.
That’s true, I started by asking why Feldstein believed a 20% increase in commodity prices was a bubble. I pointed out in my next sentence that if the Fed was causing inflation, then the increase in commodity prices was not a bubble.
I wish for higher inflation, but, unlike Glasner, I don’t hope for it. the Fed has made gigantic efforts to stimulate and inflation is well below the 2% target. What would it take to convince Glasner that the Fed can’t cause higher prices right now ? It seems to me that his faith is completely impervious to data.
OK, fair question. My point is that the Fed is still committed to a 2% inflation target. If the Fed said that it was aiming to increase the price level by 10% within a year and would take whatever steps necessary to raise prices by 10% and failed, that would be a fair test of the theory that the Fed can control the price level. But if the Fed is saying that it’s aiming at a 2% annual increase in the price level, and its undershooting its target, but isn’t even saying that it will do more to increase the rate of inflation, I don’t see that the proposition that the Fed can control the price level has been refuted by the evidence. The gigantic efforts that Waldmann references have all been undertaken in the context of a monetary regime that is committed to not letting the rate of inflation exceed 2%.
Continuing to quote from my post, Waldmann writes:
“Rising asset prices indicate the expectation of QE is inducing investors to shift out of cash into real assets”
Note the clear assumption. QE is the only possible cause of any change in asset prices. Glasner assumes that nothing else changes or that nothing else matters. He basically assumes that there is nothing under the sun but monetary policy.
I think I am being entirely fair to him. I think that, in fact, he assumes not only that monetary policy affects macroeconomic developments but that it is the only thing which affects macroeconomic developments. He has made this very clear when debating me. I think his identifying assumption is indefensible.
Sorry, but where is that clear assumption made? I said that rising asset prices could be attributed to an expectation that QE would increase the rate of inflation. My empirical study showed a strong correlation between inflation expectations and asset values, a correlation not present in the data before 2008. I didn’t say and my empirical study never suggested that asset prices depend on nothing else but inflation expectations, so I am at a loss to understand why Waldmann thinks that that is what I was assuming. What I do say is that monetary policy can affect the price level, not that monetary policy is the only thing that can affect the price level.
Waldmann concludes with a question:
I am curious as to whether there is another possible interpretation of Glasner.
The answer, Professor Waldmann, is yes! Why won’t you take “yes” for an answer? I hope that helps calm you down. It should.
PS I am sorry that I have not responded to comments recently. I have just been too busy. Perhaps over the weekend.
Uneasy Money 
David, I don´t know to which data Waldman is referring. He really doesn´t have to look far. In fact, the Fed has only used 10% of the ‘engine´s power’. It could do so much more.
http://thefaintofheart.wordpress.com/2013/05/13/missed-opportunities/
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…just about the time I think you guys have “made up”!
It’s almost as though Waldmann is trying to play that old game called “Pin the Tail on the Donkey”, only the donkey won’t stand still! Part of what is so unbelievable about the monetary/fiscal divide is that so much monetary policy is being used to stabilize what were essentially fiscal circumstances to begin with – in particular government’s vested interest in housing stock.
However, it seems that the “desired” fiscal elements (what exactly are they, anyway?) run far short of pre existing overall commitments in general, that still need money printing if they can even continue. Which is just one reason why monetary seems to have so much more impact presently, than the “latest and greatest” fiscal which everyone could actually agree upon.
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David, you write:
“My point is that the Fed is still committed to a 2% inflation target.”
If they’re committed to this and they’re not hitting it, what are they doing wrong? If you were Fed Chairman can you spell out exactly what steps you would take to hit the 2% target or the 4% target or the 10% target? Do those target levels require different actions by the Fed?
I’m not looking for an answer like “ease Monetary policy.” That’s far too vague for me! I’m looking for a list of concrete steps. I’m just curious how you think this should be implemented. Would it be an open ended QE? I.e. instead of buying $85B a month, you’d simply announce the target … and then do what? Would you need to do more than just announce it? Would you need to “buy whatever it takes” to hit your goal? Would you potentially buy more than Treasuries and MBSs? If so, what?
Now suppose you were magically ALSO put in charge of fiscal policy with all the power you needed to carry it through. What would you do on that end? More deficit spending? On what? How would you divide up the “work” of hitting each inflation goal between fiscal and monetary policy?
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Personally I liked your reaction to the last episode of Castle.
Who would have thought you were a Caskett shipper?
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While I agree with you overall, the following argument does not make sense to me: “My point is that the Fed is still committed to a 2% inflation target. If the Fed said that it was aiming to increase the price level by 10% within a year and would take whatever steps necessary to raise prices by 10% and failed, that would be a fair test of the theory that the Fed can control the price level.”
So the failure of the Fed to meet its current low target isn’t evidence of its limited capabilities because it hasn’t raised its target and failed to meet that? I don’t think “I failed to meet the low bar, but I won’t give up until I fail at the high bar” is a very convincing position.
Unless… you favor Noah Smith’s suggestion that the price level cannot be targeted to arbitrary values. 2% inflation may be impossible, but if we print enough money we surely can have Zimbabwe inflation. That would make sense of your suggestion that the Fed needs to raise the bar they’re already failing to meet, in order to prove them wrong.
Expectations can be very volatile. When we rely on the expectations channel how can we be so sure we can precisely tune expectations? If that’s the argument you’re making please say it out loud. 🙂
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Being serious I find this a little amusing. The mild mannered David Glasner hit by the volatile Robert Waldeman.
Very good reply.
I have to think of more adjectives to describe you however.
Please keep your quality output up!
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Another odd aspect of Feldstein’s perspective is his statement that the Fed is “saddled with $2 trillion in assets.”
Yeah, you know saddled, like loading a burro up with too many gold bricks.
The Fed may collapse soon, I wouldn’t stand under those imposing marble pillars if I were you. The bonds are stacked dangerously high on every floor.
I don’t get it. So what if the Fed owns a lot of securities? What happens when they own a lot of securities?
Well, they got lots of income, which they shuffle along to the US Treasury, ceteris paribus, paying down debt or lightening tax burdens (and I concede, perhaps funding Congressional goodies, but I said ceteris paribus).
I suppose the Fed is monetizing the US debt, when they buy federal IOUs. As inflation is way below even too-low targets, I do not see how monetizing debt right now is a bad idea, indeed, I rather like the idea. Deleveraging should help everyone.
And if you believe some, the Fed can’t cause inflation anyway. Monetize to your heart’s content, I’d say. Why not a couple more trillion? It might lead to inflation? Is not that the idea?
Really, are these guys (Feldstein, Waldman, others) just fronting for people who shorted bonds? What is the real source of these arguments? They do not make sense. Is it just theomonetarism, the belief that printing money is a sacred process, and should not be done just to promote prosperity?
On its holdings, does the Fed ever have to sell? Well, they can hold to maturity,if need be, and I suppose shuffle the money back to the Treasury.They can sell, if the long ,long, long feared inflation dares show up. Some say then the Fed reports a loss. Big deal. They report a loss. They can carry a “loss” forever.
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Marcus, Thanks for the link. As usual wonderfully informative visual aids.
Becky, As I pointed out in my post last night, I am basically in favor of an all of the above strategy. In any critical operation, you want to build some redundancy into the system. Think of fiscal policy as built-in redundancy.
Tom, Announce that the size of asset purchases will continue to increase until the inflation target it met and will be kept at least that level for a fixed period of time. I have no particular opinion about the asset mix. On fiscal policy, see my reply to Becky above.
nottrampis, Sorry, but I have no idea what Castle is, and I don’t know anything about Caskett shopping.
Polymath, See my answer to Tom above. The Fed has shown not even a hint of embarrassment or remorse about failing to meet its inflation target. My friend June Flanders of Tel Aviv University once told me that central bankers somehow have the view that if actual inflation turns out to equal the predetermined inflation target, that shows that they are doing their job well. However, if actual inflation turns out to less than the predetermined inflation target, they believe that they are doing an even better job, and deserve extra credit. So there is almost no evidence to show that failure to meet the Fed’s current inflation target is causing even the slightest sense of discomfort on the FOMC, and certainly not on a majority of the voting members. As I have written previously, inflation is a bad target for a central bank. A better target would be a price level or a price level path. Trying to control the inflation rate continuously is really a bad idea because the optimal rate of inflation can vary and because the central bank can’t control the short-term rate of inflation with a high degree of precision. But it can come reasonably close to stabilizing a price level or price level path over time.
nottrampis, Thanks for all your very nice adjectives. I hope that I have better control over the quality of my output than the Fed has over the rate of inflation.
Benjamin, Makes sense to me.
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David, much thanks for your answer. I realize that I asked about hitting an inflation target, but do you use the same basic strategy for NGDP targets?
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Tom, I don’t think operationally there is much difference in trying to hit one target or the other..
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