Friday, August 23, 2013

What is the stance of monetary policy?

What is the stance of monetary policy? I mean that not in the sense of what is the current stance of monetary policy, but what does it mean for monetary policy to have a stance?

Scott Sumner has a list of indicators here:
http://www.themoneyillusion.com/?p=23083

He is disagreeing with Paul Krugman's assertion that interest rates are a good indicator. I think the unwritten assumption here is whether monetary policy is effective and that determines if the idea of a "stance" makes sense. A fighting stance in an arena means you mean business. A fighting stance at a dinner party is something different. In Krugman's view, rates are great: they drop when the Fed loosens and rise when the Fed tightens and are stuck near zero when the Fed is ineffective (they can't drop, so the Fed can't loosen, but it could tighten).

Sumner says monetary policy is always effective and dominates the economy therefore tight policy must (tautologically) be associated with poor economic performance (low NGDP growth) and vice versa for loose policy. This characterization is a tad uncharitable, but I don't think it is wrong.

Effectively the theoretical assumptions define the indicator in this case. Sumner's assertion of NGDP as a better indicator contains no information beyond a re-assertion of his priors.

1 comment:

  1. Basically, if monetary policy is ineffective, how can it have a "stance"?

    ReplyDelete

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