Conservatives on Monetary Policy

We all know Scott Sumner advocates more aggressive Fed Policy, how about other conservative bloggers?

Tyler Cowen e-mails to point out his article in the Times from way back in the first of August (at least, this is the only Cowen Times article I could find on the Fed) -- I had asked him for a blog post on whether Fed policy has been habitually too tight. He backs the Sumner view as well. That was four months ago, of course, so it's hard to extrapolate that with whether he thinks Monetary Policy is clearly too tight right now. We'll have to wait for a blog post.

Although I essentially agree with Cowen's piece in the Times, I'll have to say I disagree w/ both about the magic of setting an "official" inflation target vs. an unofficial target of 2%, in the absence of doing more QE. And I do not think the whole idea that "expectations matter" was this revolutionary idea that nobody had thought of until conservative economists came around in the 1970s -- everyone involved in the 1929 market crash and ensuing depression likely realized that economic variables depend in a big way on what people think is going to happen in the future. Keynes' Animal Spirits are largely about big swings in these expectations. I also doubt Friedman was ignorant of the idea that expectations matter, whether he stressed them or not.

Why might earlier writers not have mentioned expectations? B/c it is obvious that expectation matter. What is less obvious is whether announcing a policy shift in the absence of doing anything is effective. To be fair, Sumner wants more QE as well, and both he and Cowen probably realize that credibility matters, even if Cowen didn't mention it in his article, because it's fairly obvious credibility matters.

Olivier Blanchard, in his textbook, argued that inflation targets, even in the absence of other policy changes, can have major real effects on the economy. He writes that because Japan initiated an inflation target (w/out ever doing much QE, with the little that was done having been quickly reversed), that now economists were bullish on the archipelago that it would beat its deflation and recession. Japan announced an inflation target in 2003. Blanchard was wrong.

Cowen also suggested I read Kling and Caplan -- at some point in the past I'd stopped reading them. Only so many hours in the day. They haven't posted "recently" on the Fed's overly tight posture the past 12 months, but I did see that Bryan Caplan believes that inflation bet Bob Murphy that inflation wouldn't go over 10% sometime in the next six years. That's a smart bet. The only way Bob Murphy wins this is if the price of oil skyrockets. Which is a possibility...

Here Kling argues for balanced budgets in a recession. Crazy.

He also points to a good paper by Hetzel.

I gave up trying to find their views on whether, right now, Fed policy is too tight or not. And so I'll ask them directly.

UPDATE: Tyler posts about why we need a formal inflation target of 2%. I still think that in the absence of more QE, announcing a 2% target formally (vs. informally) is not all that helpful.