A guest post by Mark Sadowski
Simon Wren-Lewis has written a response to a post by Giles Wilkes in which he addresses the nature of the disagreement between monetarists such as Scott Sumner, David Beckworth and Marcus Nunes, and fiscalists such as Paul Krugman, Simon Wren-Lewis and Jonathan Portes. I want to start in the middle because this is the part I have the biggest disagreement with:
“Suppose we had fiscal austerity well away from the ZLB. Suppose further that for some reason the monetary authority did not take measures to offset the impact this had on aggregate demand, and there was a recession as a result. I suspect a MM would tend to say that this recession was caused by monetary policy, even though monetary policy had not ‘done anything’. (In this they follow in the tradition of that great monetarist, Milton Friedman, who liked to say that monetary policy caused the Great Depression.) The reason they would say that is not because fiscal policy has no effect, but because it is the duty of monetary policy to offset shocks like fiscal austerity. That is why fiscal policy multipliers should always be zero, because monetary policy should make them so.So Mark Sadowski got upset with my statement because in his view ECB policy failed to counteract the impact of Eurozone austerity, and could have done so, which meant the recession in 2012/3 was down to monetary policy, not fiscal policy.
So we come to the heart of the disagreement – the ability of monetary policy to offset fiscal actions at the ZLB.”
Sigh. This is *part* of the heart of the disagreement, but an even bigger problem seems to be what constitutes doing “nothing”, and where we seem to think the “ZLB” is located. Let’s review the history of policy interest rates in the big four advanced currency areas since the Great Recession started:
Note that since at least the middle of 2009 policy rates in the U.S., Japan and the U.K. have indeed been more or less constant, and provided one views this strictly in a Neo-Wicksellian sense, it can be argued that the central banks of these currency areas have done “nothing”. However, notice the big red pimple that bursts forth in 2011. That is the ECB raising the Main Refinancing Operations Rate (MRO) just prior to the start of the second Euro Area recession and the round of the Euro Area sovereign debt crisis. This is most certainly not doing “nothing”, even in an extreme Neo-Wicksellian sense.
The second thing at the heart of our disagreement is where the ZLB is located. ZLB is an acronym which stands for the “zero lower bound” in policy interest rates. In practical terms the ZLB is interpreted as meaning about 0.25%, 0.1% and 0.5% in the U.S., Japan and the U.K, respectively. In the case of the Euro Area the meaning of ZLB is less clear cut although the MRO is currently 0.15% and my impression is that Mario Draghi is still implying that the Governing Council of the ECB is willing to drop the MRO even lower “if necessary”.
But note that prior to raising of the MRO in 2011, it stood at 1.0% which is nowhere near the practical definition of ZLB in any of the big four advanced currency areas. This was raised to 1.25% in April 2011, and then to 1.5% in July. Only in May 2012 was the MRO brought down to the 0.5% rate that in practical terms constitutes the ZLB in the U.K. Only in November 2013 was the MRO dropped to 0.25% which constitutes the upper bound of what in practical terms constitutes the ZLB in the U.S. And the MRO is still above the 0.1% rate that in practical terms constitutes the ZLB in Japan.
So my question to fiscalists is, at what point did zero stop meaning “0” and start meaning “1.0”, or “1.5”, or whatever?
The other thing I want to address is this issue of apparent “asymmetry”. But first let’s look at Simon Wren-Lewis’ description of what he thinks the responsibilities of monetary and fiscal policy should be.
“I do not like the label fiscalist for this reason – it implies a belief that fiscal policy is always better than monetary policy as a means of stabilising the economy. (Giles Wilkes is not the first to use this term – see for example Cardiff Garcia, who includes more protagonists.) Now there may be some economists who think this, but I certainly do not, and nor I believe does Paul Krugman or Jonathan Portes. I described in this article what I called the consensus assignment: that monetary policy should look after stabilising aggregate demand and fiscal policy should be all about debt stabilisation, and there I described recent research (e.g.) which I think strongly supports this assignment. However there has always been a key caveat to that assignment – it does not apply at the ZLB.”
This seems to have been written in response to a comment I had written here only Simon Wren-Lewis expresses what should be the responsibility of monetary policy even more like what I personally believe than I did in my comment, in part because I was so eager to express the “consensus assignment” in terms which I thought would not be at all controversial. But I truly believe that “stabilizing aggregate demand” (nominal GDP or NGDP) is precisely what monetary policy should be doing.
And this brings us to the problem of “asymmetry”, which is at the heart of Simon Wren-Lewis’ post.
“Economists like Paul Krugman, Jonathan Portes and myself (and there are many others) do not argue against using UMP. Indeed PK pioneered the idea of forward commitment for Japan, and I have been as critical as anyone about ECB policy. We do not argue that fiscal policy will be so effective as to make unconventional monetary policy unnecessary, and so write countless posts criticising those promoting UCM. To take a specific example, I happen to think that the recent ECB moves will have less impact on the Eurozone than continuing fiscal austerity, but I do not say the ECB is wasting its time as a result. They should do more.”
This is all true of course, but on the other hand I don’t recall Scott Sumner, David Beckworth or Marcus Nunes spilling a lot of ink on what Simon Wren-Lewis acknowledges is the consensus assignment of fiscal policy, which is debt stabilization. I would hardly argue that monetarists are indifferent to the issue of debt stabilization, but they certainly don’t spend all their time arguing about what monetary policy can do to address it, because they readily acknowledge that this is fiscal policy’s responsibility, not monetary policy’s responsibility.
We are now six years out from the start of the Great Recession, and there is now finally what I think is legitimate discussion about when we should be leaving the ZLB, at least in the U.S. and the U.K. At what point will fiscalists stop wringing their hands over the “liquidity trap” and start to worry about what is the consensus assignment of fiscal policy, which is debt stabilization? What I sense is they aren’t really interested in the consensus assignment of fiscal policy.
And who can blame them? Debt stabilization is dull. It is *really* dull. Why worry about something so dull when you can worry about something which is so much more exciting, which is obviously aggregate demand stabilization.
And this I think is the crux of the real asymmetry. Monetarists are genuinely interested in the consensus assignment of monetary policy, which is aggregate demand stabilization. Fiscalists show no interest at all in the consensus assignment of fiscal policy, which is debt stabilization.
So what I think we have here is a severe case of “assignment envy”.
And what I fear is that seven, eight and nine years out from the Great Recession, and with policy interest rates at 1.0%, 2.0% and 3.0% the fiscalists are still going to be talking about the “liquidity trap” and the need for fiscal stimulus, because they simply find fiscal policy’s consensus assignment a tedious bore. (But who can blame them?)