“Grim23” on fiscal policy versus monetary policy in Australia

By a complete accident I found a online debate about fiscal policy versus monetary policy in Australia. One of the commentators – “Grim23” – surely is a convinced Market Monetarist. I thought what he is writing is so good that I want to reproduce it here on my blog – I hope he won’t mind…

Here is Grim23 going back and forth with somebody – I don’t care who the other guy is and this is only Grim23’s (unedited) comments:

…How can fiscal stimulus boost demand when the central bank is targeting inflation? If interest rates are above zero, the central bank should have no problem hitting its inflation target. if they fall to zero, there is a case for fiscal stimulus, but monetary policy would still be effective.

Monetary policy in the US, UK and Europe has been extremely tight since mid 2008. Australia had much more effective monetary policy than Britain during the crisis. Fiscal policy has nothing to do with it. Every serious new keyensian macroeconomist will tell you that if interest rates are above zero the fiscal multiplier is zero.

…If you admit that monetary policy was effective, then by definition fiscal policy is ineffective and wasteful. If monetary policy can hit its target of 2-3% trend inflation, what’s the point of fiscal stimulus?

While we are quoting people, how about prominent Keyensian economist Brad Delong:

“Here is the point: an optimizing central bank that cares only about inflation and unemployment because it does not find itself at the zero nominal lower bound and does not fear engaging in nonstandard monetary policy will engage in full fiscal offset: it will take care to make sure that if fiscal policy becomes more stimulative then it will make monetary policy less stimulative by the same amount.”

Tim Harcourt did not take the monetary offset into account. In fact few studies take it into account when they really should.

…Ultimately the point is that because fiscal stimulus boosts aggregate demand, inflation must also rise as well as GDP. If the RBA is targeting inflation (or preferably nominal GDP) then any fiscal stimulus is cancelled out by monetary policy, leaving a “fiscal multiplier” of zero.

…1. You agree with Brad Delong’s quote which means you admit that an inflation targeting central bank will engage in full monetary offset. That means that the fiscal multiplier is zero.

2. In terms of “saving Australia from recession”, inflation and unemployment are the only outcomes that matter. If you agree with the Brad Delong quote, I can’t see how you can still claim that fiscal stimulus boosted aggregate demand and saved the economy.

I would say that most of the countries hit are in the Eurozone, so big fiscal stimulus in one country would work, because each country doesn’t have its own monetary policy. Also, most central banks weren’t brave enough to do unconventional stimulus when interest rates hit zero, so fiscal stimulus would have had some effect, as central banks were no longer really “aiming” to hit a target. Thats why there was some correlation

If you want some links, then the best blog for this is The Money Illusion.

Here’s a post on monetary offset. Read point 6 in particular. Fiscal austerity is deeper in the US than the Eurozone, but monetary policy is easier. US is growing faster. Money wins. http://www.themoneyillusion.com/?p=21008

Here’s a couple of posts about Australia, talking about the stable growth rate of NGDP. Australia has a much higher trend growth rate than other countries, which put us in a better position to start with.


Ultimately tight monetary policy causes slow NGDP growth, not financial crises or fiscal austerity, and only easy money can support faster NGDP growth, not fiscal stimulus.

Yes, fiscal stimulus can “work”, but only because the central bank allowd it to. Do you really think the RBA would let Australia fall into recession? Particularly when they started off from a much better position than other central banks, with interest rates not even close to zero here. Monetary stimulus would have done the job anyway, without any waste or extra debt. That’s why fiscal policy never “saved” us.

Here’s some more posts discussing fiscal stimulus and monetary policy in general:


Fiscal stimulus in unnecessary. Money always wins

…Your argument simply isn’t consistant with standard macro theory; the fiscal multiplier is zero under inflation targeting. Even keynesians like paul krugman, brad delong, michael woodford, ben bernanke, greg mankiw, frederik mischkin and christie romer will attest to that if interest rates are positive.

In Australia interest rates never got close to zero.

You argument does not support recent events, with no correlation between “austerity” and economic growth. Nor have you refuted any of the arguments made in the links.

While Australia recovered quite quickly, other nations have done better since. Germany is one example, where the fiscal stimulus was average but growth has been faster than Australia’s since 2010.

There is still not sufficient evidence that Australia would not be in the same position were it not for the fiscal stimulus. I find it hard to believe that the RBA would have let Australia fall into recession without fiscal stimulus, nor do i doubt that it had the means to stabilise nominal GDP growth, especially with the fortunate position of positive interest rates.

I think the fact that we were the only country with interest rates which never went below zero is just as persuasive as your argument about the relative size of the stimulus. I think it is more persuasive given the wider context and evidence. I think your mistake is assuming that correlation implies causation.

…As you should know, there is no meaningful difference between 0.5% and zero percent benchmark rate.

If famous nobel prize winning economists can talk about the federal reserve having a “zero rate policy”, then that technical detail should not be important. that just shows how out of touch you are with the sophisticated macro debates going on at the moment.

The point is rates can go no further in countries other than poland and australia. I have provided you with plenty of reasons why your figures don’t support your clsim of the effects of fiscal stimulus. In your reply you dont even mention the links, or reply to all of my criticism. Either you didn’t read them, or you can’t refute them. But they explain Australia’s and Poland superior performance without reference to fiscal stimulus. I suggest if you want to learn a little macro, you should read them. What i am saying is not controversial, every single new keyensian economist and every market monetarist will tell you the same thing!

As for Germany, the world bank data said it grew faster in 2010 and 11. My links are sound.

I have no clue who Grim23 is, but he is good good and he can write a guest post on this topic for my blog any time he wants.

PS Grim23 unfortunately didn’t quote this post on Australian monetary policy why it was the “Export Price Norm” that really has kept Australia out of recession.

PPS I believe that RBA recently has allowed monetary conditions to become too tight and the sharp slowdown in NGDP growth over the past year is somewhat worrying.


Remembering the “Market” in Market Monetarism

A couple of days ago the young and talented George Mason University economist Alex Salter wrote the following statement on his Facebook account:

I wish market monetarists would put relatively more emphasis on the “market” bit.

I agree with Alex as I believe that one of the main points of Market Monetarism is that not only do money matters, but it equally important that markets matter. Hence, it is no coincidence that the slogan of my blog ismarkets matter, money matters” and it was after all me who coined the phrase Market Monetarism.

Paul Krugman used to call Scott Sumner a quasi-monetarist, but I always thought that that missed an important point about Scott’s views (and my own views) and that of course is the “market” bit. In fact Alex’s statement reminded me of a blog post that I wrote back in January 2012 on exactly this topic.

This is from my post “Don’t forget the “Market” in Market Monetarism”:

As traditional monetarists Market Monetarists see money as being at the centre of macroeconomic discussion. To us both inflation and recessions are monetary phenomena. If central banks print too much money we get inflation and if they print to little money we get recession or even depression.

This is often at the centre of the arguments made by Market Monetarists. However, we are exactly Market Monetarists because we have a broader view of monetary policy than traditional monetarists. We deeply believe in markets as the best “information system” – also about the stance of monetary policy. Even though we certainly do not disregard the value of studying monetary supply numbers we believe that the best indicator(s) of monetary policy stance is market pricing in currency markets, commodity markets, fixed income markets and equity markets. Hence, we believe in a Market Approach to monetary policy in the tradition of for example of “Manley” Johnson and Robert Keheler.

Interestingly enough Alex himself has just recently put out a new working paper – “There a Self-Enforcing Monetary Constitution?” –
that makes the exact same point. This is the abstract from Alex’s paper:

This paper uses insights from monetary theory and constitutional political economy to discover what a self-enforcing monetary constitution — one whose rules did not require external enforcement — would look like. I argue that a desirable monetary constitution (a) institutionalizes an environment conducive to economic calculation via an unhampered price mechanism and (b) enables agents acting within the system to uphold the rule even in the presence of deviations from ideal knowledge and incentive assumptions. I show two radical alternatives to current monetary institutions — a version of NGDP targeting that relies on market implementation of monetary policy and free banking — meet these requirements, and thus represent self-enforcing monetary constitutions. I ultimately conclude that the maintenance of a stable monetary framework necessitates branching out from monetary theory narrowly conceived and considering insights from political economy, and constitutional political economy in particular.

I very much like Alex’s constitutional spin on the monetary policy issue. I strongly agree that the biggest problem in the conduct of monetary policy – basically everywhere in the world – is the lack of a clear rule based framework for the monetary system and equally agree that NGDP targeting with “market implication” and Free Banking fulfill the requirement for a monetary constitution. Or as I put it in my 2012 post:

In fact we want to take out both the “central” and “banking” out of central banking and ideally replace monetary policy makers with the power of the market. Scott Sumner has suggested that the central banks should use NGDP futures in the conduct of monetary policy. In Scott’s set-up monetary policy ideally becomes “endogenous”. I on my part have suggested the use of prediction markets in the conduct of monetary policy.

…Even though Market Monetarists do not necessarily advocate Free Banking there is no doubt that Market Monetarist theory is closely related to the thinking of Free Banking theorist such as George Selgin and I have early argued that NGDP level targeting could be see as an “privatisation strategy”. A less ambitious interpretation of Market Monetarism is certainly also possible, but no matter what Market Monetarists stress the importance of markets – both in analysing monetary policy and in the conduct monetary policy.

Hence, Alex and I are in fundamental agreement, but I also want to acknowledge that we – the Market Monetarists – from time to time are more (too?) focused on the need to ease monetary policy – in the present situation in the US or the euro zone – than to talk about “market implementation” of monetary policy.

There are numerous reasons for this, but the key reason is probably one of political realism, but there is also a serious risk in letting “political realism” dictate the agenda. Therefore, I think we should listen to Alex’s advice and try to stress the “market” bit in Market Monetarism a bit more. Afterall, we have made serious inroads in the global monetary policy debate in regard to NGDP level targeting – why should we not be able to make the same kind of progress when it comes to “market implementation” of monetary policy?

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