Paul Krugman thinks interest rates is a good indicator of the stance of monetary policy

In a recent post Krugman writes:

I know that there are economists for whom it’s always 1978, who are constantly fearing — or, I suspect, in their innermost selves, hoping — for a return of the good old days when inflation was a constant threat. But in the world we’ve been living in this past quarter-century or more, inflation expectations haven’t moved much, and nominal interest rates have, in practice, been a pretty good guide to the stance of monetary policy.

As the charts indicate, falling and low rates in 2001-03 did not stop nominal spending undershooting the trend level. In that sense, monetary policy was tight (and tightening). It was only when “forward guidance” was introduced that spending reversed, i.e., monetary policy became expansionary despite rates remaining constant. Conversely, rising rates after mid-2004 would be inappropriately characterized as restrictive monetary policy actions. On the contrary, they can be thought as defensive moves required by the higher real rates associated with growing confidence in the economy and the resulting strength in private spending.

The goal of such actions is not to raise the level of interest rates, but to maintain the desired rate of money growth.

Inflation Nostalgia_1The next charts indicate that at present, despite the maintenance of “zero” rates, monetary policy is still tight since spending remains far below trend and is not moving in the right direction. QE1 and its successors was mostly a palliative!

Inflation Nostalgia_2And if you´re thinking about the dangers to inflation, look again!

Inflation Nostalgia_3

8 thoughts on “Paul Krugman thinks interest rates is a good indicator of the stance of monetary policy

  1. “[F]alling and low rates in 2001-03 did not stop nominal spending undershooting the trend level. In that sense, monetary policy was tight (and tightening).” Your equivocation at the end is rather troubling, but if we ignore the parenthesis it seems that by your definition ‘tight’ monetary policy is what produces nominal spending below trend, ‘easy’ above. (You don’t follow Scott Sumner in basing the definition on expectations of spending rather than on actual spending.)

    But is that Krugman’s definition? I don’t read him often enough to know—I suspect that, like most people who talk about ‘tight’ and ‘easy’ monetary policy, he has offered *no* definition; but if he has something else in mind, you are talking past each other.

    • The full quote seems to evaluate the monetary stance by changing inflation expectations. The bolded portion, in which nominal interest rates are mentioned, should be read in context with the emphasis on pathways of inflation expectations.

      • Any difference between you and Sumner is minor. My point was to suggest that Krugman might well be employing a conception of ‘easy/tight’ different from yours/Sumner’s.

  2. Pingback: TheMoneyIllusion » Interest rates are always and everywhere a horrible guide to the stance of monetary policy

  3. Philo He clearly stated that interest rates (maybe of the real variety, given the stability of inflation expectations) has been a good indicator of the stance of MP. It hasn´t!

  4. Pingback: Test Post | The Wilberforce Society

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