Curiosity killed the cat. I just had to look at the paper. I read the whole thing and some of the conclusions aren’t what I expected them to be.
Methods of Policy Accommodation at the Interest-Rate Lower Bound
Michael Woodford, Columbia University, August 20, 2012
Here’s my summary of it:
- Woodford thinks the largest problem the Fed has is communication – not making any commitments at all is sending the wrong signals.
- Operation Twist doesn’t do anything.
- QE might do something, but the expansion of the base isn’t expected to be permanent, so it sits there (it also has to do with IOR/IOER negating the opportunity cost of holding M2 assets when the effective FF rate is low). (It obviously can’t do absolutely nothing because they used it avoid deflation and were successful.)
- Inflation targeting with bygones being bygones is BAD
- Communicate with a commitment to restoring NGDP and long run inflation to the pre-crisis trend as a first step.
The Fed should:
The rest of it is fuzzy, more like suggestions for how to clear out the base that has already been created. I found it a bit puzzling that at the top of his list is fiscal policy for stimulus. He didn’t provide rationale for it or it was inferred by the rest of the discussion and I missed it. I am curious about what fiscal stimulus is going to do instead of QE when that is really like comparing apples and oranges. Obviously the government can’t self finance more spending (!) and so it would need someone to buy the debt. I wonder who that might end up being. Wouldn’t it just be easier to retire a bunch of bonds without them being redeemed?
When I first saw what appeared to be great news that Woodford had endorsed NGDP level targeting, I was ecstatic. The quality of this paper is pretty high, but the end of it reminds me of some of the history/biography books I have where I can tell the last ½ or ¾ was rushed – where it feels disjointed, padded, watered down, and thus is a disappointment. Sure, the important parts, things the Fed has been doing wrong, and some of that it can do right are emphasized with appropriate “punch” for the situation, but the paper very light in recommendations and a clear path forward. I suppose it’s up to Bernanke to figure the rest out, but I think unless someone hands him a canned answer, he isn’t going to do anything with it.
Think about this for a moment. We have a floating exchange rate and Bernanke was worried about oil prices. Bernanke took cookie-cutter monetary policy and imposed it on the US when he should have known full well that slapping a 2% inflation ceiling on the economy after deflation is a really stupid idea, also inconsistent with the law. He refuses to budge on his inflation stance when he supposedly knows what caused the Great Depression and for whatever reason can’t see signs of it in the data. He has no intention of returning the economy to trend growth.
So, I am disappointed that Woodford didn’t write the forward guidance statement or tell them to start monetizing some debt (or whatever else they could do to get people to believe that the Fed is doing something to meet its commitments (legal responsibilities!!)). I am also disappointed that he left off on a fiscal stimulus note – something that is currently politically impossible (with good reason).