Janet Yellen at Jackson Hole in 50 words or less

Will unconventional monetary policy be over anytime soon?

Yellen: No. It has become our norm.

Will interest rates go back to pre-crisis levels anytime soon?

Yellen: No. The world has changed.

Is the Fed raising rates?

Not quite. Since December 2015, long term rates are lower, not higher. (See Chart)

Is interest rate policy helpful for growth?

Yellen: It is not enough.

yield curve

Connecting the Dots: Debt, Savings and the Need for a Fiscal Growth Policy

Twice in the second half of the twentieth century, in the midst of a robust economy, economists optimistically talked about the taming and even “the death of the business cycle” based on the belief that advances in macroeconomics had reached a point of perfection. Yet, both times, the economy underwent serious turbulence and the policies that seemed to have “solved the problem” proved inadequate to the challenges presented by unexpected realities. In the 1970s, the “neo-classical synthesis,” with its faith in forecasting and macroeconomic “fine tuning,” succumbed to stagflation and a new theory, the Monetarist paradigm, came to prominence. By the 1990s, Monetarists and their descendants— the rational expectations and New Keynesian models—had convinced themselves, and policy makers, that they could stabilize the economy for good and that policy intervention beyond interest rate adjustments and inflation targeting was no longer necessary. The Financial Crisis of 2007-8 and the subsequent “Great Recession” should have been a wake-up call that, just as in the 1970s, instability was not gone and that a new paradigm for running the economy was needed.

Yet, as of today, the orthodoxy continues to dominate the policy debate in the United States and in Europe shaping inadequate policy responses to the main problem of contemporary capitalism: the persistence of private debt overhangs and their impact on both short run and long run growth. However, rather than examining these issues, OECD countries—Europe in particular—and many emerging markets have continued to embrace a framework under which central banks setting the “price” of money, or setting the quantity of the “monetary base”, is the only game in town. Accordingly, the world’s central bankers have launched a series of ad hoc stabilization programs, driven by extensions of the Monetarist/New-Keynesian paradigm, which evidently do little to address the consequences of the financial crisis.

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Helicopter money: Too confused to be helpful

In his piece on helicopter money, Lord Adair Turner seemed to argue that:

1) The money multiplier provides the needed boost to expansionary fiscal policy, yet this boost could generate inflation.

2) The risk of inflation could be managed by raising reserve requirements as needed.

Both statements are incorrect.

And this is the slightly expanded version of my Letter to the Financial Times (FT.COM published an abridged version)

In ‘The helicopter money drop demands balance’ (May 22), Lord Adair Turner defends the notion that bigger fiscal deficits are needed to end the current stagnation, but leaves one question unanswered: Why should a money-financed deficit be more powerful than a traditional debt-financed deficit?

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