I see in one of his papers he writes:
We distinguish between quantitative easing in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted.I have a few problems with this. First is that Quantitative easing is usually defined as targeted asset purchases by a central bank, of assets other than short-term Treasuries. Second, that "quantitative easing ... "is likely be ineffective at all times". (I wish I could get away with such grammar lapses in my Abstract for papers I submit...) In any case, he's arguing that even if the Fed creates trillions of dollars out of thin air and monetizes the entire US debt, that it will have no impact on inflation, gdp, or other economic variables. However, "targeted asset purchases of non-liquid assets", such as MBS, are likely to help.
I'd say, if your model is telling you this, then you need a different model.
Nevertheless, patently ridiculous or not, this paper be gettin' published at the AEJ.
I suggest you read the entirety of Woodford's paper. He doesn't say that. Woodford is defining quantitative easing as a temporary purchase of assets that is reversed in the next period of the model. If you simply expand the money supply and then contract it later, and if the public expects this, quantitative easing will have no effect. However, he fully believes that if the public expects a permanent increase in the money supply due to quantitative easing that it will be effective. He's arguing essentially that if the public expects you to buy up assets to increase the money supply and then turn around and contract the money supply in a later period - then nothing will happen. What Woodford actually argues is that quantitative easing will be effective if it is expected to be permanent. But then he says, if you have that amount of credibility to convince the public your expansion is permanent - then you shouldn't even need to do QE. Since if you can commit to keeping an expanded monetary base, you should be able to convince the public about future interest-rate path policy and so escape the liquidity trap anyway by manipulating inflation expectations.
ReplyDeleteWoodford is hardily so stupid to believe that if you expand the monetary base by a few trillion that it won't effect the price level. What he is saying is if you expand the monetary base by a few trillion and the public expects that once the zero lower bound is no longer binding you are just going to contract the monetary base THEN it will have no effect. Remember when inflation ticked up in Japan in the mid-2000s- what happened? The BOJ started going contractionary. If the public understood the BOJs intent, it's no wonder their quantitative easing program did almost nothing.
So, you're accusing Woodford of bait-and-switch? In the abstract, he argues that the difference between "QE" and "targeted asset purchases" are that "targeted asset purchases" are of non-liquid assets, and that that's the key difference.
ReplyDeleteIn any case, what you're arguing he argued is still crazy -- when Japan did QE things did get better, and then they reversed it even though that was hardly unexpected. And when they did their $100 billion in QE earlier this year, it made an impact in the exchange market immediately even though it is clearly a temporary phenomenon.
So, I'm going to go ahead and say it: Any model that implies that any amount of QE today that is reversed once we have inflation will not generate inflation is nuts and should be discarded. The reason: The policy reversal in period 2 is conditional on there being growth/inflation!
-TV