Sunday, August 25, 2013

Taylor Jackson Hole Blog

John Taylor is blogging from Jackson Hole

Day 1: Skepticism of unconventional policy  Academics say quantitative easing does't do much. I happen to agree

Forward guidance Is "forward guidance" clarification of a rule, i.e. here is what we think we'll feel like doing in the future, or a precommitment? To the Bank of England and ECB, the former.

This looks like an interesting series to watch.


  1. I’m not sure I’d describe it as “interesting”. Many amateur economists like me recognised QE as a damp squib when it was first mooted, and no doubt many professionals saw that as well. But I’d go further – and this really is – ahem – “interesting”.

    ALL MONETARY POLICY is defective – particularly interest rate adjustments – because it only adjusts investment, i.e. the policy is distortionary. That is, there is no more logic in bring stimulus just via investment than there is in bringing it just via restaurants, massage parlours and car production.

    In contrast, fiscal adjustment CAN BE distortionary if just a few types of spending are boosted. But fiscal stimulus NEEDN’T be distortionary: i.e. that stimulus can come via a broad range of types of government spending plus via a boost to private sector spending.

  2. Check out John Taylor's website. In a 2006 paper he gushed about the positive effects of QE in Japan.

    Fredric Mishkin, Meltzer, Bernanke, Milton Friedman all advised Japan to go big on QE.

    Now we hear QE is no good.

    Well...seems to be working----maybe it just needs to be revved up...

    1. Well, I'm cheering because I never thought QE made any difference. The joke is getting tired but it's good -- take away your red M&Ms, give you green M&Ms, why should this affect your diet.

  3. I think the correct phrasing is "Quantitative easing doesn't do much GOOD. It does plenty, most of it bad.

    Here is a good source for understanding forward guidance in less than 3 minutes from Clarke and Dawe.

    "And what sort of statements does [Bernanke] make, Adam?"
    "Very, very, very, very, very, very, very, very, very, very careful ones."

    "He does it in a somewhat Delphic manner, Brian. There's a metaphysical quality to a lot of Ben's work"

    "Everybody knows if the market were efficient it wouldn't have destroyed itself".

    1. Your last comment reveals that you don't know the definition of market efficiency. Hint, it does not mean clairvoyance. Go look it up.

    2. All three "comments" are quotes from the video. It's very funny. You should watch it.

    3. Sorry for picking on you. I didn't watch the video. A sore spot.

    4. The video is absolutely hilarious. Strong five stars for brightening up a monday morning!

    5. ...and by "Go look it up", Dr. Cochrane actually meant "sign up for my MOOC!" ;-)

  4. So how do you explain the fact that as soon as Fed hinted at end of QE, all the markets dropped ? coincidence ?

    1. No. Not a coincidence but not proof that QE is effective either.

      QE has helped inflate some asset prices. It has probably given some boost to the housing market by direct purchases of MBS as part of QE (at a cost of the Fed taking on interest rate and default risks). That does mean it has been effective at improving the economy.

    2. Don't you think those two are highly cointegrated ?

  5. Professor Cochrane,

    I cannot believe that a Chicago Academic (!) Is against something that Milton Friedman favored. The reason QE hasn't done enough good is that not enough of it has been tried.

    And before you start talking about the definition of insanity, let me say that we have a natural experiment, between Europe and America. Europe has tried fiscal austerity and monetary austerity. It has been a horrific disaster.
    America is trying fiscal austerity, but with very small (relative to what is needed!) monetary stimulus. The result has been very weak economic growth.

    Oh and dont get me started on the market. How do you explain the markets' reaction to the end of QE?

    QE is monetarist.
    Its pro-market
    It can be rules based if implemented with an NGDP target.

    You should be all in favor

    Why are you not?

  6. John Cochrane:

    Thanks for your reply.

    Well. so far the critiques of QE have run the gamut from that it was monetizing the debt and would axiomatically lead to hyperinflation, to that QE is totally inert (your MM example). Sometimes the same critic has leveled both charges against QE!

    I cannot prove anything, but I contend a reasonable conjecture is that we are in a happy medium between the two extreme outcomes predicted for QE.

    Yes, bank reserves have swollen, and banks are not lending them out (though C&I landing is up, and real estate is booming, so some lending is going on).

    But people sold bonds to the Fed, and they now have cash. They must have wanted to sell, to be liquid.

    Why? Why did bond sellers choose to sell?

    The bond sellers now have an immediate claim on output, should they choose (they can buy stuff). They can also invest immediately in equities or property.

    During QE3, property and stock rallied, retail sales grew.

    So, I think it is incorrect to say QE is inert, unless you contend that all bond sellers put all their money into the banks, and none of it was lent out. Moreover, none of the bond sellers decided to buy stuff, or invest in stocks and property.

    My complain, is that the Fed has been timid, feeble, indecisive--it should have gone straight to QE3 and tapering up, until we saw robust economic growth for two years running....but then, central bankers have a squeamish aversion to prosperity....

    my full name is Benjamin Mark Cole, I do not know why I am only Benjamin on your site....


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