Tony Yates: Monetary Policy didn´t do it!

In the comments of his post commenting on Simon Wren-Lewis defense of NGDP targeting Tony Yates says monetary policy did not cause the Great Recession. No wonder he thinks it´s OK to keep trying IT!

Peter K.says:

January 3, 2015 at 3:48 pm

Higher profile economists like Krugman and Christina Romer have said it’s worth a shot. Woodford too I believe. We’ve had inflation targeting for many years and it hasn’t worked. Why not try something new. If the Central Bank is failing at NGDP path level targetting it’s a lot more obvious than how they’ve been failing at inflation targeting.

Krugman advocated for a higher inflation target as well but now has given up on both apparently viewing them as politically impossible.

January 3, 2015 at 3:55 pm

Why not? Because I don’t think it would fix anything that is problematic about inflation targets. It won’t help us escape the zero bound, and NGDP targeting would not have helped avoid the financial crisis. That was caused not by bad monetary policy, but by bad financial regulation policy.

He urgently needs to shed some of the “straight-jackets” under which he´s operating!

2 thoughts on “Tony Yates: Monetary Policy didn´t do it!

  1. I agree about the straight-jackets. Perhaps he should complete an assignment on the practical problems of creating a bunch of unemployment when negative supply shocks hit for starters. It’s one thing to really like a certain idea, but to hold on to it, insisting nothing is broken when just about every weakness of inflation targeting including the mythical ZLB was encountered during the financial crisis is beyond rational. Are you sure that engaging Mr. Yates isn’t just shooting fish in a barrel?

  2. So I read Mr. Yates’ post and the take away I picked up on was that he is skeptical because 1) he doesn’t buy into rational expectations (and probably not EMH); 2) doesn’t think forcing a delineated level mandate on the central bank would result in socially optimal policy even much less than most of the time, which I think is probably more of an argument for allowing discretionary flexibility rather than against level targeting per se (assuming central bank competence or it won’t be abused by ideologues I suppose).

    I don’t have that much of a problem with responsible flexible inflation targeting, in the theoretical definition of it. But unlike Yates, I don’t view it as the optimal policy due to supply-side noise in inflation data. It doesn’t make sense to me to put scores to the X power of people out of work in a general sense because Nigerian rebels commandeered a few oil platforms, or a hurricane wiped out a few rigs in the Gulf of Mexico, or a deep freeze destroyed a bunch of crops. Apparently, Yates has no problem with it as he glibly states:
    In fact, if you were to tell me that people don’t like the idea that unemployment might vary a lot from one period to the next, throwing them out of their jobs, I’d say: well, the corollary of such fluctuations is unplanned inflation in the model, so though they are telling you that they dislike unemployment changes, part of the solution to tackling those, is curiously, to eliminate inflation changes.

    He doesn’t elaborate any further, but it seem to be a bit of circular logic at least as far as negative supply shocks are concerned.

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