Cochrane’s inconsistencies

I just came across a couple of weeks old post from John Cochrane’s blog. Cochrane seems to be very upset about the calls for easier monetary policy in the euro zone. Let’s just say it as it is. Even though Cochrane is a professor at the University of Chicago he is certainly not a monetarist. It is sad how the University of Chicago has totally abandoned its proud monetarist traditions.

Here is Cochrane:

“As you might have guessed, I think it’s a terrible idea (Cochrane refers to a weakening of the euro engineered by easier monetary policy)…The biggest reason is the vanity that you can do it just once. “Devalue and inflate the currency” is hardly a new idea. Portugal, Italy, Spain, and Greece lived on a cycle of continual devaluation and inflation until they joined the Euro.  Going on the Euro was a hard won transformation to precommit to get off this cycle. “

Hence, Cochrane thinks easier monetary policy is very evil. However, in the in the comment section Cochrane states the following:

“I like a price level target. I view money as a set of units for value, and I don’t think the government artfully devaluing the meter and kilo to give shopkeepers a boost is a good idea, any more than fooling with inflation to do so, even if it does “work,” at least once. I’m less of a fan of NGDP targets, and the link from interest rates to price level is pretty tenuous…More coming, a comment isn’t the place for an entire monetary-fiscal program.”

Again you would think that Milton Friedman would be screaming from economist heaven about Cochrane’s odd references to the “tenuous” link between the price level and interest rates – as if interest rates are telling us much about monetary policy. Anyway, note that Cochrane says he likes a price level targeting regime. Fine with me. Then why not endorse Price Level Targeting for the euro zone professor Cochrane?

The graph below shows the euro zone GDP deflator and a 2% trend path for prices. The 2% path is of course what the ECB would be targeting if it implemented a Price Level Target as supported by Cochrane. Now have a look at the graph again and tell me what the ECB should do now if it was a Price Level Targeter?

The graph is very clear: Monetary policy is far too tight in the euro zone and as a result the actual price level is far below the pre-crisis 2% path level.

If Professor Cochrane was consistent in his views then he would obviously conclude that the ECB’s failed monetary policies are keeping the euro zone price level depressed, but I am afraid he did not even care to study the numbers.

Cochrane should obviously be calling for massive monetary easing in the euro zone. Milton Friedman would do so.

I can only again say how sad it is that the University of Chicago professors continue to disregard the economics of Milton Friedman.

PS I hope I am wrong about the University of Chicago so I would be happy if my readers would be able to find just one staffer at UC that is actually a monetarist. Ok, I would be happy if you could just locate a student at UC who has read anything Milton Friedman had to say about monetary theory.

PPS I really do not like this kind of attack on what other economists are writing on their blogs. However, as an admirer of Milton Friedman the continued indirect badmouthing of Friedmanite monetarism by the present day University of Chicago professors upsets me a great deal.

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Related posts:

See here on another University of Chicago professor who doesn’t care about Milton Friedman.

Another post on why the ECB should target the GDP deflator rather than HICP.

Did Casey Mulligan ever spend any time in the real world?

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…

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