“To kill a mockingbird”: Don´t use a 12 gauge shot gun.

Mike Konczal ends his post thus:

An objective bystander would say that if the taper is being read as tightening even though future expectations language is the same, it means that we should be throwing everything we have at the problem because everything is in play. That includes fiscal policy. As Woodford writes, “[t]he most obvious source of a boost to current aggregate demand that would not depend solely on expectational channels is fiscal stimulus.” We should be expanding, rather than contracting, the portfolio channel, while also avoiding the sequester and extending the payroll tax cut. Arguments, like Woodford’s, about the supremacy of any one approach tend to get knocked down by all the other concerns.

The expectations channel is being blocked in several ways, most importantly because there´s  not a clear identifiable target on which everyone, including the Fed, can focus. “Throwing everything we have at the problem” unfortunately will not only not help solve it but will cause a lot of additional distracting noise. In fact, that´s been the story over the past few years.

4 thoughts on ““To kill a mockingbird”: Don´t use a 12 gauge shot gun.

  1. Konczal’s conclusion is totally incoherent.

    If recent events prove that Gagnon is right, namely that the portfolio balance effect exists, and Woodford is wrong, namely that other things matter than just expectations, then the implication is that QE is effective and we simply need to do what the market wants which is evidently more QE.

    Moreover if Woodford is wrong with respect to the portfolio balance effect and the strong version of the expectations channel, why on earth follow his other advice concerning fiscal stimulus? How does being wrong on those things make him more credible with the other?

  2. Well, I must admit I am out of step a bit it here.

    When it comes to helicopter drops, I would send in the money-bombing B52s, and when it comes to QE, I would “taper”—-but taper up that is, for every month we are below civilian employment ratios of 2008.

    But…my idea of fiscal stimulus is only tax cuts and cash payments to people who will spend the money….not sure if that is fiscal or monetary stimulus, when you think about it…..in a world of QE that is….

  3. QE isn’t affecting M2 growth because it’s staying on deposit at the Fed. Perhaps the Fed should be buying a “civilian asset” from nonbanks, such as gold? That money would go straight into M1.

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