tag:blogger.com,1999:blog-8897997766931633186.post7542980188244795248..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Lewis-Wren on Fiscal PolicyBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-8897997766931633186.post-23048017018207674392014-01-10T14:29:15.913-05:002014-01-10T14:29:15.913-05:00I agree that an optimal policy is to maintain a st...I agree that an optimal policy is to maintain a steady growth path for NGDP by adjusting the quantity of money based upon future NGDP expectations.<br />At the ZLB the authorities have 2 choices: Monetary or Fiscal policy. I disagree with your view that monetary policy trumps fiscal policy. Here’s why.<br />Fiscal policy works by adjusting the govt deficit. This increases income which increases expenditure and (hopefully) increases RGDP. This can be done (via helicopter-drop style activities) with no direct govt expenditure on goods at all. The effect is very direct and if done within an NGDP-targeting framework not likely to be affected by Ricardian equivalence.<br /><br />Monetary policy work at the ZLB by a much more roundabout way. The CB swaps money for other financial assets. This new money will be used to purchase other assets (driving up their price) and eventually as people’s nominal wealth increases they will start to increase expenditure on final goods (which will then lead to an increase in RGDP just as with fiscal policy).<br /><br />I can see a number of reasons why the fiscal approach may be a better way of increasing NGDP. Here’s why: <br /><br />1. Other things being equal (and using reasonable assumptions) the base will have to increase much more under monetary policy than under fiscal policy to achieve a given NGDP target at the ZLB. The increase in the base will drive up asset prices and reduce the return on these assets. These asset-bubbles and lower interest rates on risky ventures (over and above the zero interest rates on risk-free assets) may have negative effects on the economy.<br />2. Very much related to point 1 is the fact that under fiscal policy it is possible for the authorities to target interest rates as well as a given level of NGDP. They can do this by using the deficit to control NGDP and using bond purchases to maintain a given positive interest rates. This means that they can keep interest rates close to the (estimated) natural rate better than with monetary policy alone.<br />3. Monetary policy benefits people who hold assets more than tgoise who don’t (and the more assets you have the more you benefit). The reason for this is that most of the additional expenditure is due to the “wealth effect” of increased asset prices.<br />I think that fears that using fiscal policy to target NGDP will lead to dangerous govt deficits are misplaced. If deficits are used only to address shortfalls in private expenditure that would otherwise lead to recession then I do not see why this would be problem (they would be balanced out by govt surpluses when private expenditure would otherwise increase NGDP beyond target. <br />Market Fiscalistnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-41312062595519952252014-01-09T21:40:51.701-05:002014-01-09T21:40:51.701-05:00The benefits of an NGDPLT are visible in 'hist...The benefits of an NGDPLT are visible in 'history':<br />http://thefaintofheart.wordpress.com/2014/01/10/visible-benefits-of-level-targeting-ngdp/João Marcushttps://www.blogger.com/profile/13658264244033012660noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-39215377914061303402014-01-09T20:59:44.261-05:002014-01-09T20:59:44.261-05:00If the target for the growth path of nominal GDP s...If the target for the growth path of nominal GDP stayed the same, there would be a modest increase in the growth path of the price level and real output. Very little impact on the growth path of employment. Some run down in inventories. <br /><br />Did you mean some other kind of monetary policy, like holding a policy interest rate or the growth path of base money constant?<br /><br />Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-50008633412631973752014-01-09T13:04:29.074-05:002014-01-09T13:04:29.074-05:00Assume the Federal government decides today to bor...Assume the Federal government decides today to borrow $1 trillion and spend it in the next 12 months on roads, bridges and other infrastructure and on giving money to the states to hire teachers, police and related facilities. Assume all other policy remains the same, including announced monetary policy.<br /><br />What do you believe would happen to GDP (real and nominal), employment, inflation and any other such aggregate you consider relevant?foosionnoreply@blogger.com