When I present my talk on the 2008 recession there are always questions about my claim that money was tight in 2008. Smarter questioners will often say it doesn’t matter whether you call it loose or tight. It’s just semantics. I sympathize with this view, but I think it’s wrong. If monetary policy was widely seen as being highly contractionary in late 2008, the recession would have been far milder. That’s because people would have demanded an easier monetary policy. As a counterfactual, imagine the same degree of tightness achieved with an 8% nominal interest rate. Don’t you think that when unemployment soared to 10% there would have been a chorus of demands that rates be cut? Everyone would agree that money was tight if we had 8% nominal rates and deflation in nearly 2009. So words do matter.
Here’s Ryan Avent:
So why is tapering being discussed at all? A good question. Some of those in favour of tapering are of the view that the size of the Fed’s balance sheet, rather than the pace at which it is growing, is the right gauge of the stance of monetary policy (at least where QE is concerned).
OK, a question is being raised. Which is the better way of characterizing the stance of monetary policy. Let’s think about this logically . . .
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Um, what exactly does ‘stance’ mean? Further down I put the definition of ‘stance’ that I found on the internet. But that definition isn’t really helpful. So what does ‘stance’ mean? I don’t doubt that somewhere you can find a definition where it refers to the level of interest rates. But there are two problems with that definition:
1. It’s wrong; no one except Joan Robinson thinks high rates during hyperinflation represent tight money.
2. It’s not really a definition of ‘stance,’ it’s an example of how the term might be applied to the level of interest rates. But it doesn’t tell us what ‘stance’ actually MEANS. Why are high interest rates viewed as tight money? And hence it’s not helpful in figuring out how to characterize a non-interest rate-oriented monetary policy like QE. Is it the level, or the rate of change in bond holdings that matter? We can’t answer that question without knowing what ‘stance’ means. And there is no definition that makes any sense.
Actually there is one definition that is logical, Ben Bernanke’s definition:
The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman . . . nominal interest rates are not good indicators of the stance of policy . . . The real short-term interest rate . . . is also imperfect . . . Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.
But since Ben Bernanke and I are the only two people in the world who believe that this is the “right” definition (i.e. most sensible), it’s not very helpful in communication. Make that one, Bernanke has stopped believing this.
For the rest of the population, it makes about as much sense to argue whether the level or change in bond holdings best measures the phluggeratiousness of monetary policy as it does to argue which best measures the stance of monetary policy. Of course everyone except Steve Williamson agrees that doing more QE is as expansionary or more expansionary than not doing more QE. But the absolute stance? First we’d have to come up with a definition of ‘stance.’
Here’s stance defined on the internet:
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the way in which someone stands, esp. when deliberately adopted (as in baseball, golf, and other sports); a person’s posture.“she altered her stance, resting all her weight on one leg”
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the attitude of a person or organization toward something; a standpoint.“the party is changing its stance on the draft”
synonyms: attitude, stand, point of view, viewpoint, opinion, way of thinking, outlook,standpoint, position, angle, perspective, approach, line, policy More
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2.CLIMBINGa ledge or foothold on which a belay can be secured.
If you google the phrase: “stance of monetary policy definition,” the first item is from a Federal Reserve publication:
There is no clear consensus about the appropriate definition of a “neutral interest rate” to be used to evaluate whether monetary policy is “easy” or “tight.”
Yikes, that’s not very helpful.
So let’s go to the second item:
When I started blogging I kept claiming that the steep recession of 2008-09 was caused by ultra-tight Fed policy. I had the distinct impression that almost no one agreed with me. Even some who favored NGDPLT preferred to call the mistakes “errors of omission,” not tight money causing a recession.
Oh wait, that’s from TheMoneyIllusion. The one that contains the Bernanke quotation. I’m using Google to try to find out what a word means, and it brings up my own rambling blog post.
Moving on we have Investopia’s definition in the 3rd and 4th spot:
When a central bank (such as the Federal Reserve) attempts to expand the overall money supply to boost the economy when growth is slowing (as measured by GDP). This is done to encourage more spending from consumers and businesses by making money less expensive to borrow by lowering the interest rate. Furthermore, the Federal Reserve also has the authority to purchase Treasuries on the open market to infuse capital into a weakening economy.
Also known as an “easy monetary policy”.
At least it’s a definition. But “attempts?” The Fed cut rates in 1930 in an “attempt” to boost the economy. Was that easy money? Not according to the most respected book on monetary history ever written.
Number 5 is some EU article. Number 6 is something I wrote for Cato Unbound. Number 7 is a David Beckworth post.
So 40% of the top 7 items dredged up by Google are written by market monetarists. I guess that makes us the experts.