We agree on nothing – me and that other guy who will run the Fed

Here is what I believe:

1) Monetary policy is highly potent – also at the Zero Lower Bound.

2) Monetary and fiscal policy should be strictly rule-based. That also goes for financial regulation.

3) The fiscal multiplier is roughly zero if the central bank has an inflation target, an NGDP target or a price level target.

4) Central banks should not be engaged in bailing out countries, banks. companies or individuals. Central banks should not conduct credit policies. Central banks should focus on it’s nominal target.

5) Free markets and the price system work well if monetary policy does not mess up things.

Here is what the likely next Federal Chairman seems to think:

1) There is a liquidity trap so monetary policy is impotent and quantitative easing is not working

2) Central bankers should not follow rules – neither should the fiscal authorities. Policy makers are all-knowing benevolent dictators. And particularly the next Fed Chairman is very clever.

3) Fiscal policy works great in the hands of clever policy makers like the next Fed chairman.

4) The primary role of central bankers is to be firefighters. They should run around and put out fires started by irresponsible bankers and investors in the private sector.

5) Free market capitalism is inherently unstable and it is the job of the Fed to “correct” the price system. Luckily the Fed chairman is all-knowning.

I guess I can only be positive surprised going forward…


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  1. Lars, do you mean by credit policies; altering interest rates, restricting lending or borrowing conditions, or allowing more favourable interests to certain groups like small businesses or large businesses? What is the main difference between central bank conducting lender of last resort functions and bailing out certain countries, businesses or individuals?

  2. LLR policies don’t have to be directed at specific financial organizations. For example, the Goodfriend-King approach to LLR is to have the monetary authority continue ordinary open market operations. If an organization needs liquidity, it can buy liquidity with assets. The monetary authority’s job is making sure the broader monetary aggregates don’t collapse. Ideally it lets the market price/allocate the injected liquidity according to the preferences and liquidity of financial organizations.

    Credit policy is basically nonmarket allocation of credit. Propping up specific assets and/or targeted bailouts can be examples of credit policy. Ordinary policy aimed at targeting interest rates (or their expected future levels) is still bad economics, but it isn’t credit policy.

  3. Benjamin Cole

     /  September 14, 2013

    Maybe it is not all gloomy…Krugman told Summers to think big if he gets the nod…

    Print, baby, print.


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