Miles Kimball has a new column suggesting that negative interest rates are the magic bullet that would have produced a robust recovery in late 2009:
The paper Robert Hall presented at last month’s Jackson Hole conference (pdf) on monetary policy has a good statement of this widely-held view that the zero lower bound has been a major factor in the miserable course of economic events in the last few years (pdf). The simple truth is that the Great Recession was very painful and US unemployment is still painfully high five years later, primarily because of the zero lower bound. Even without the ZLB, there would have been some hit from the financial crisis that ensued with the bankruptcy of Lehman Brothers on Sept. 15, 2015, but negative interest rates in the neighborhood of 4% below zero would have brought robust recovery by the end of 2009.
He might be right, indeed my very first blog post (after the intro) suggested negative interest rates on reserves. But there are also lots of other magic bullets that would have greatly moderated the Great Recession. Nominal GDP level targeting. Price level targeting from September 2008. QE pursued a outrance.
The problem is that the Fed wasn’t willing to do any of them.
Consider the widely rumored “taper” that may be announced next week. Is this something the Fed would do if policy were actually constrained by the zero bound? Of course not! Indeed the reason often cited for tapering in the face of subpar employment and inflation data is that the Fed actually has a third objective. It’s worried that QE produces super low interest rates and helps inflate asset bubbles. I think that is absolutely crazy, but it’s apparently the view within the Fed. So if the current near-zero rates are seen as causing asset bubbles, how do you think the FOMC would feel about a proposal for negative 4% interest rates?
We as a profession need to stop looking for magic bullets and start asking why most economists favor tighter money even as we are falling below our inflation and employment objectives. The Fed follows the consensus. Until we change the consensus there is no hope for a better policy.
One reason I lean toward NGDPLT is that unlike negative rates it doesn’t require low interest rates to work. Instead of lowering markets rates, you try to raise the Wicksellian equilibrium rate. That’s easier to sell to a profession that has become very squeamish about low rates.
And BTW, we as a profession need to stop saying that QE has absolutely no affect on asset prices even as asset markets are FREAKING OUT over the prospect of an end to QE. I mean, is one of the qualifications for becoming an economist that you have to promise to never pay any attention to what market signals are telling us about the impact of policy? (And I’m calling out both sides of the ideological spectrum here.)
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