In “Kids prefer cheese”, blogger Angus must have failed his economic history class. Likely so has Adam Posen, who has done a stint at the BoE´s MPC before moving to head the Peterson Institute and has been a co-author with Bernanke:
On the limited power of monetary policy to control the real economy, you can start with Adam Posen’s recent review essay. Here’s a good bit:
Indeed, central bankers should be far humbler today than they were in recent decades, when some claimed credit for the so-called great moderation, the period of reduced economic volatility that lasted from the late 1980s to the early years of this century. It is now clear that the prosperity and stability much of the world enjoyed during those years were largely the result of good luck.
In my view, Posen, if anything is overstating the power of monetary policy over the real economy.
Consider post 2007 US monetary history. The Fed promptly took the policy rate to zero. We still had big problems. So the Fed started QE. We still had big problems. So the Fed did further rounds. We still had big problems. So the Fed tried forward guidance. We still had big problems. So the Fed tried outcome-based as opposed to calendar-based forward guidance. Guess what? We still have big problems (I know, counterfactuals are a b**ch, but the Fed clearly didn’t fix things).
You may say, “but recoveries after financial crises are always slow”. But people, that’s just another way of saying that Central Banking is not that powerful when it’s most needed!
You may say, “but they should have done more and that would have fixed things”.
That’s borderline epistemic closure. “The right monetary policy can do anything. The economy is not fixed, so the right monetary policy was not employed”, is going to be pretty hard to ever disprove.
I think some of the Summers backlash is because Larry understands that the power of monetary policy for the real economy is rather limited.
It´s not a question of “doing more” but doing differently. Angus is really a slave to what Christy Romer called “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter”.
As to “The economy is not fixed, so the right monetary policy was not employed”, is going to be pretty hard to ever disprove” is not true because that´s exactly what FDR did in March 1933, even if his other mistakes held things back.
Central bankers who dismiss monetary policy effectiveness off hand have no place being central bankers. Note, for example that the “Great Inflation” went on for more than a decade. During seven of those years Arthur Burns also thought monetary policy was powerless to restrain the inflation that raged on. After all, it was due to supply side (or real) factors – unions, oligopolists, etc. Funny, isn´t it, that monetary policy can neither constrain aggregate demand nor increase it (or keep it on a stable path)! If it can´t do anything, drop it from the textbooks and never mention the words again.