A James Alexander post
My last blog might have got a little carried away with analogies. The import might thus have been lost of my killer quote from what Yates called the “classic survey from 1999 … [where] … there has been a torrent of work since, reconfirming this basic message” of how monetary policy has to operate.
While this paper by Christiano, Eichenbaum and Evans does not support Yates view of long and variable lags view it also asserted the centrality of the growth rate of money as the central test of monetary policy.
“To actually implement a particular monetary policy rule, the growth rate of money must (if only implicitly) respond to current and past exogenous shocks in an appropriate way.”
It’s funny but I had not really thought that this would have been controversial today. I thought it was just a statement of the bleedin’ obvious. What else is monetary policy other than the supply of money? It’s what a central bank does.
Yet read Yates and there is no money supply in his model. Wierd or what? I was then musing worriedly like the rest of the world about just what the FOMC were really on about in the extensive minutes published of their July meeting. The ones that when published on August 19th triggered the latest global sell-off.
They read just like any competent economic survey or macro investment report on the state of the economy. “On the one hand this, on the other hand that”, etc, etc, perhaps a bit overlong. Actually way too long. TBH I gave up and skimmed after the first two thousand words or so.
But then I thought, hey, this is the supreme monetary authority of the world what do they say about the growth rate in the money supply, their key weapon in implementing monetary policy as stated by Yates’ “classic survey”. Well, I was not going to read the whole 8000 words when I have Acrobat’s word search function.
(To be fair the first 600 words or so is a list of the eighty, yes 80 attendees at the discussions of what was partly a joint meeting of the Fed’s Board of Governors and the FOMC and all their official titles. The list includes three “Economists” and six “Associate Economists”. Perhaps this might be another post as everyone knows that discussion meetings with more than 6 or so people are completely pointless. And also presents very serious issues with keeping any sensitive matters secret, again limiting discussion.)
My word search didn’t seem to work. There was no mention of the money supply. There were only two mentions of money at all, both as in “money market interest rates”. I tried “monetary conditions”, but no joy.
“Monetary” came up frequently, as in the two “Deputy Directors of the Monetary Affairs Division” (plus one Assistant Director), the Division’s two Senior Advisers (plus one plain Adviser), one Associate Director (plus his deputy), one Project Manager, one Section Manager and, of course, their own Senior Economist. I guess if the actual Director had been there too the room might not have been big enough.
“Monetary policy” came up a lot too – sadly mostly in the context of the “normalization” of it, and we know that only means one thing – tightening.
I then had to re-skim the 8000 words to see if the discussion on monetary conditions or the money supply was somehow encoded elsewhere. But no, it wasn’t. Nothing. Nada. If anything monetary conditions, at a stretch, seemed to be associated with whatever the interest level was: a low rate means easy money, without actually looking at the growth rate of the money supply itself.
It’s a sad thing that on the verge of a momentous policy decision to start actively tightening, sorry, normalizing, monetary policy there is no discussion or investigation whatsoever into actual monetary conditions. As I said, weird or what?
Monetary policy has, of course, been actually tightening as the debate has heated up – witness the carnage in markets, and well, the zero growth in the money supply.
Oh, and as you survey your stock market investments, don’t forget they tell you nothing about the effect of monetary policy, it only operates with long and variable lags.