University of Chicago economics professor Casey Mulligan has a new comment on Economix. In his post “Who cares about Fed funds?” Mulligan has the following remarkable quote:
“New research confirms that the Federal Reserve’s monetary policy has little effect on a number of financial markets, let alone the wider economy.”
Mulligan’s point apparently is that the Federal Reserve is not able to influence financial markets and as a consequence monetary policy is impotent. First of all we have to sadly conclude that monetarism is nonexistent at the University of Chicago – gone is the wisdom of Milton Friedman. I wonder if anybody at the University of Chicago even cares that Friedman would have turned 100 years in a few days.
Anyway, I wonder if Casey Mulligan ever spent any time looking at real financial markets – especially over the past four years. I have in a number of blog posts over the last couple of months demonstrated that the major ups and downs in both the US fixed income and equity markets have been driven by changes in monetary policy stance by the major global central banks – the Fed, the ECB and the People’s Bank of China. I could easy have demonstrated the same to be the case in the global commodity markets.
Maybe Casey Mulligan should have a look on the two graphs below. I think it is pretty hard to NOT to spot the importance of monetary policy changes on the markets.
Of course it would also be interesting to hear an explanation why banks, investment funds, hedge funds etc. around the world hire economists to forecast (guess?) what the Fed and other central banks will do if monetary policy will not have an impact on financial markets. Are bankers irrational Professor Mulligan?
Anyway, I find it incredible that anybody would make these claims and it seems like Casey Mulligan spend very little time looking at actual financial markets. It might be that he can find some odd models where monetary policy is not having an impact on financial markets, but it is certainly not the case in the world I live in.
Let me finally quote Scott Sumner who is as puzzled as I am about Mulligan’s comments:
“Yes, Mulligan is a UC economics professor. And yes, Milton Friedman is spinning faster and faster in his grave.”
Yes, indeed – Friedman would have been very upset by the fact that University of Chicago now is an institution where money doesn’t matter. It is sad indeed.
Update: Brad Delong is “slightly” more upset about Mulligan’s piece than Scott and I are…
PS Maybe professor Mulligan could explain to me why the US stock market rallied today? Was it a positive supply shock or had it anything to do with what ECB chief Draghi said? And then tell me again that markets do not care about monetary policy…
Richard A.
/ July 26, 2012According to Wikipedia–
http://en.wikipedia.org/wiki/Milton_Friedman
Milton Friedman was at the University of Chicago from1946 to 1977. That’s over 35 years ago.
Lars Christensen
/ July 26, 2012Richard, that is right. Friedman made UC great. If he had not been around nobody would listen to University of Chicago professors.
Unfortunately I fear that nobody at the UC even cared to read anything Milton Friedman ever wrote.
George Selgin
/ July 26, 2012Even if Mulligan deserves to be forgiven for failing to recognize, as any post-Wicksellian monetary economist ought to, that the real effects of monetary policy are best gauged, not by checking whether interest rates are directly correlated with measures of real activity, but by attempting to compare deviations of rates from their presumed “natural” levels with real changes, he certainly shouldn’t be forgiven for thinking that “immune with” is proper English idiom.
Lars Christensen
/ July 26, 2012George, I would hate to have get into a real bad argument with you – I fear I would be killed;-)
George Selgin
/ July 26, 2012Lars, as long as there are anti-fractional reserve types still breathing, you may rest easy.
Lars Christensen
/ July 26, 2012George, that we will not disagree on – but I am working on (yet another) answer to your challenge to the MM’ers on wage adjustments. It is not that wages are not sufficiently flexible, but rather that there has not been ONE monetary shock since 2008, but numerous…but I guess we will not really disagree on that matter either.
Saturos
/ July 27, 2012Looking forward to that post!
It’s funny – in 1998 Casey Mulligan was named by the Economist as one of the brightest young stars of the profession…
Benjamin Cole
/ July 27, 2012The Fed has no real effect o the cony or financial markets?
Yahoo! Have the Fed buy up the national debt, and funnel interest payments back into the Treasury. Tax cuts for everyone!
On a serious note, the long-term global trend of interest rates is south, for the last 20 years. This is effectively obliterating the conventional central bank tool of lower interest rates to stimulate economies.
Lower interest rates are about as useful as a firehouse against a flood, now.
This may mean that QE becomes a permanent policy tool.
So what do central banks do with all the assets they acquire?