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Pushing on the string

RGC said in reply to Peter K.... Friday, September 04, 2015 at 09:22 AM

"There's no reason full employment can't be done via monetary policy which is government intervention."

Care to show how that can happen? Since monetary policy adds no new spending, how does it increase demand. Btw, all the Fed chairman disagree with you.

Peter K. said in reply to RGC... Friday, September 04, 2015 at 10:20 AM

Once monetary policy lead to tight labor markets - as it did in the late 90s, or more accurately the monetary-fiscal (and trade) mix leads to tight labor markets, worker bargaining increases and we see labor sharing in productivity gains.

There's the new spending. Plus monetary policy adds new spending in other ways, perhaps not as directly as fiscal policy.

The problem is that fragile financial systems collapse before we see a sustained wage boom.

That argues for heavy regulation of the financial sector, especially when fiscal policy is blocked.

Peter K. said in reply to RGC... Friday, September 04, 2015 at 10:23 AM

"Btw, all the Fed chairman disagree with you."

Monetary policy now means QE since we're stuck at the ZLB thanks to fiscal austerity.

"Imperfect substitutability of assets implies that changes in the supplies of various assets available to private investors may affect the prices and yields of those assets. Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy. Following this logic, Tobin suggested that purchases of longer-term securities by the Federal Reserve during the Great Depression could have helped the U.S. economy recover despite the fact that short-term rates were close to zero, and Friedman argued for large-scale purchases of long-term bonds by the Bank of Japan to help overcome Japan's deflationary trap.5

Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors' expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about "tail" risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors.

With the space for further cuts in the target for the federal funds rate increasingly limited, in late 2008 the Federal Reserve initiated a series of large-scale asset purchases (LSAPs). In November, the FOMC announced a program to purchase a total of $600 billion in agency MBS and agency debt.6 In March 2009, the FOMC expanded this purchase program substantially, announcing that it would purchase up to $1.25 trillion of agency MBS, up to $200 billion of agency debt, and up to $300 billion of longer-term Treasury debt.7 These purchases were completed, with minor adjustments, in early 2010.8 In November 2010, the FOMC announced that it would further expand the Federal Reserve's security holdings by purchasing an additional $600 billion of longer-term Treasury securities over a period ending in mid-2011.9

About a year ago, the FOMC introduced a variation on its earlier purchase programs, known as the maturity extension program (MEP), under which the Federal Reserve would purchase $400 billion of long-term Treasury securities and sell an equivalent amount of shorter-term Treasury securities over the period ending in June 2012.10 The FOMC subsequently extended the MEP through the end of this year.11 By reducing the average maturity of the securities held by the public, the MEP puts additional downward pressure on longer-term interest rates and further eases overall financial conditions.

How effective are balance sheet policies? After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve's large-scale purchases have significantly lowered long-term Treasury yields. For example, studies have found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points.12 Three studies considering the cumulative influence of all the Federal Reserve's asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are economically meaningful.

Importantly, the effects of LSAPs do not appear to be confined to longer-term Treasury yields. Notably, LSAPs have been found to be associated with significant declines in the yields on both corporate bonds and MBS.14 The first purchase program, in particular, has been linked to substantial reductions in MBS yields and retail mortgage rates. LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC's decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.

While there is substantial evidence that the Federal Reserve's asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual--how the economy would have performed in the absence of the Federal Reserve's actions--cannot be directly observed. If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board's FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.15 The Bank of England has used LSAPs in a manner similar to that of the Federal Reserve, so it is of interest that researchers have found the financial and macroeconomic effects of the British programs to be qualitatively similar to those in the United States."

RGC said in reply to RGC... Friday, September 04, 2015 at 10:26 AM

Fed chairman Marriner Eccles:

The first use of "pushing on a string" in a monetary policy context may have occurred in hearings before House Committee on Banking and Currency on March 18, 1935, concerning the proposed Banking Act of 1935. Marriner Eccles, who was appointed Chairman of the Fed in 1934 and served on the Board of Governors until 1951, was taking questions from Rep. Thomas Alan Goldsborough (D-MD) and Prentiss M. Brown (D-MI). The hearings are here; the relevant exchange is on p. 377, during a discussion of what the Fed might be able to do to end deflation.

Governor Eccles: Under present circumstances there is very little, if anything, that can be done.

Mr. Goldsborough: You mean you cannot push a string.

Governor Eccles: That is a good way to put it, one cannot push a string. We are in the depths of a depression and, as I have said several times before this committee, beyond creating an easy money situation through reduction of discount rates and through the creation of excess reserves, there is very little, if anything that the reserve organization can do toward bringing about recovery. I believe that in a condition of great business activity that is developing to a point of credit inflation monetary action can very effectively curb undue expansion.

Mr. Brown: That is a case of pulling the string.

Governor Eccles: Yes. Through reduction of discount rates, making cheap money and creating excess reserves, there is also a possibility of stopping deflation, particularly if that power is used combined with this broadening of eligibility requirement.

Later in the hearings, several other speakers refer back to the "push on a string" comment, which clearly had some resonance. Although I have seen the "can't push on a string" metaphor attributed to John Maynard Keynes in a number of places, I haven't seen an actual primary source where Keynes used the phrase.

Ben Bernanke:

Ben Bernanke Blames Low Government Spending For The Bad Recovery — This Shows He's Totally Right

Joe Weisenthal
Dec. 18, 2013, 3:22 PM

Bernanke just made a very important statement, as proved by the fact that everyone on Twitter tweeted it at the same time.

According to Bernanke, the economy still sucks because there's been so little government spending.

Peter K. said in reply to RGC... Friday, September 04, 2015 at 10:34 AM

Bernanke was just using fiscal policy as an alibi for why he wasn't doing his job. Technically yes, fiscal austerity makes the central bank's job more difficult.

Peter K. said in reply to RGC... Friday, September 04, 2015 at 10:36 AM

This is what Tobin would have said to Eccles per Bernanke.

"Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy. Following this logic, Tobin suggested that purchases of longer-term securities by the Federal Reserve during the Great Depression could have helped the U.S. economy recover despite the fact that short-term rates were close to zero, and Friedman argued for large-scale purchases of long-term bonds by the Bank of Japan to help overcome Japan's deflationary trap."

RGC said in reply to Peter K.... Friday, September 04, 2015 at 09:35 AM

"There's no reason full employment can't be done via monetary policy which is government intervention."

Keynes also disagrees with you:

"Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative."

Peter K. said in reply to RGC... Friday, September 04, 2015 at 10:29 AM

Keynes wrote many different things.

"Keynes viewed monetary policymakers’ focus on certain short-run interest rates not as an inherent limitation in monetary policy, but as a limitation in the ways monetary policy was conventionally practiced. He notes that governments did not usually buy long-term bonds and drive down long-term interest rates, but that there was no reason they could not."

Peter K. said in reply to Peter K.... Friday, September 04, 2015 at 10:32 AM

Until I see all long-term rates driven down to zero and we still don't have tight labor markets with rising wages, I won't accept Keynes's speculation.

Why rule it out unless it's been tried.

But yes usually central bankers ask for fiscal help during crises and complain about fiscal headwinds during recoveries. There is a monetary-fiscal mix.

Peter K. said in reply to RGC...

I used to be closer to your position, but Don Kervack's bad arguments and poor style have driven me more to a monetarist or at least agnostic position.

Friday, September 04, 2015 at 10:38 AM
Peter K. said in reply to Peter K....

Kervack and others seem to believe that if they repeat their argument often enough that monetary policy doesn't work, regardless of whether it's true or not, then eventually the government will turn toward stimulative fiscal policy.

That doesn't logically follow. The government may chose to do neither monetary nor fiscal policy after being convinced of monetary policy's ineffectiveness.

Friday, September 04, 2015 at 10:44 AM



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