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Adam Posen calls for more QE – that’s fine, but…

Adam Posen who sits on the Bank of England’s Monetary Policy Committee (MPC) has a comment in on New York Times’ website.

Adam Posen is known to favour aggressive quantitatively easing in the present situation and in his piece he argues strongly that both the ECB and the Federal Reserve should follow the lead from the BoE and step up aggressive QE.

Posen rightly criticize the Fed, the BoE and the ECB with being too reluctant to do the “right thing” and in many ways his comments resembles my own critique of policy makers as being “Calvinist” in their thinking.

Posen is also right in arguing that more definitely is needed in both Europe and the US in terms of easing monetary conditions, but I have often argued that Market Monetarists are not in favour of discretionary policies (See here and here). We want to see QE within a proper framework of NGDP level targeting and not discretionary monetary “stunts”. The experience with both QE1 and QE2 in the US shows that unless is anchored within a proper framework then the impact on NGDP expectations are likely to be relatively short-lived.

I think that there might be some disagreement among Market Monetarists here and I guess that for example Scott Sumner would be happy to take whatever we can get, while I personally is more skeptical. If QE is done in an ad hoc fashion outside of a clearly defined policy framework then I fear it will undermine the longer-term arguments for NGDP level targeting. Some are already arguing that QE did not work – I think QE works very well if it is done within a proper framework, but how can we convince the skeptics?

That does of course not mean that I would vote against more QE if I for example was on the BoE’s MPC or the FOMC (there is no chance that will ever happen…). And it is quite obvious that the ECB need to ease monetary policy right now and rather aggressively – even within ECB’s present framework.

Anthony Evans seem to share my concerns about QE without a proper framework. See Anthony’s comment here and here.

See also Marcus Nunes and Scott Sumner on Adam Posen’s comment.

PS Theoretically I also disagree quite a bit with Posen as it seems like he think that the monetary transmission mechanism works primarily via lower bond yields. It’s basic MM knowledge that successful monetary easing (increased NGDP expectations) will increase bond yields. See my previous comment the transmission mechanism here. Even though I am skeptical about Posen’s call for ad hoc monetary easing I in fact think that monetary policy with the help of the Chuck Norris Effect is much more powerful than Posen seems to think.

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9 Comments

  1. Scott Sumner

     /  November 22, 2011

    I agree that there is a risk of discrediting QE, if it is done outside an explicit policy framework. I also agree that lower bond yields are not the transmission mechanism.

    Reply
  2. Scott, we need for once to disagree on something, but luckily we don’t;-)

    Reply
  3. Perhaps we need a bit of Socratic dialogue with the inflationphobics.

    Q: What has caused more damage; entrenched inflation (the 1970s) or massive deflation (1929-32)?
    A: Deflation. But that is not what we face.
    Q: What has caused more damage; entrenched inflation (the 1970s) or unexpected disinflation during a leveraging crunch (2008-?).
    A: But inflation is evil.
    Q: Why is inflation bad?
    A: Because it distorts private decisions.
    Q: Does it do that making basic parameters for judgement unreliable?
    A: Yes.
    Q: So it is about creating a clear and reliable framing for private decisions?
    A: Yes.
    Q: So, a central bank should provide a reliable framework for private decisions?
    A: Yes.
    Q: So it is about framing expectations in a credible way?
    A: Yes.
    Q: So, what is more important to people, expectations about income or expectations about prices?
    A: [Some obfustication]
    Q: So, should not a central bank seek to credibly generate expectations about income?
    A. [Some more obfustication]
    Q: In a highly leveraged age with many wages set by contracts operating across time and a range of “sticky” prices, which is more important to people, expectations about money income or “real” income?
    A. [Even more obfustication]
    Q: So, would not a clear target about aggregate income (aka NGDP aka Py) create a framework to anchor expectations in what people actually care about?
    A: [Meltdown]

    Reply
  1. Lorenzo´s Socratic dialogue on NGDP Targeting « The Market Monetarist
  2. Six central banks take action, but where is Chuck Norris? « The Market Monetarist
  3. Wauw! We have a Market Monetarist at the Telegraph « The Market Monetarist
  4. Boettke’s important Political Economy questions for Market Monetarists « The Market Monetarist
  5. Lets concentrate on the policy framework « The Market Monetarist
  6. The “Dajeeps” Critique and why I am skeptical about QE3 « The Market Monetarist

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