macroresilience

resilience, not stability

Macroeconomic Stimulus: Theory Vs Practise

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There are many schools of macroeconomic thought. Most people agree that some form of stimulus is needed during a recession but what should this stimulus look like? Is monetary stimulus sufficient or do we need fiscal stimulus as well? What should this monetary stimulus look like? Do we need quantitative easing? Or is effective monetary stimulus largely about conditional forward guidance as Michael Woodford and Mark Carney seem to think?

Macroeconomic stimulus in practise is however a one-trick pony that has almost no relation to the theoretical debate. In the developed world since the Great Moderation, macroeconomic policy can be boiled down to one simple rule – prop up asset prices. In the Anglo-Saxon world, the rule is even simpler – prop up house prices. Mark Carney may grab all the headlines regarding UK economic policy but the only policies that matters to the UK economy are George Osborne’s attempts to boost the housing market.

There is nothing novel about this. Alan Greenspan was always quite frank about his approach to monetary policy. For all the talk about Taylor rules and how central banking and monetary policy became a rule-based science in the 1980s, the reality of Greenspan-era monetary policy was much simpler and followed only one rule – do not allow asset prices to fall. Abenomics is simply the logical end-stage of Greenspan’s monetary policy doctrine. Greenspan only needed to cut rates when stock markets tanked but the Bank of Japan needs to literally buy equity ETFs and real estate investment trusts(REITs) every week to prop up the markets. The Bank of Japan would love to provide more support to the housing market but unfortunately its purchases are already too large for the REIT market. Maybe the BOJ could buy up the housing stock of the country and rent it back to the people of Japan? Maybe eventually all assets in capitalist “free-market” economies will be owned by the central bank? What could possibly be objectionable about such an economic system?

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Written by Ashwin Parameswaran

September 12th, 2013 at 8:31 pm

Posted in Monetary Policy

7 Responses to 'Macroeconomic Stimulus: Theory Vs Practise'

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  1. “Maybe eventually all assets in capitalist “free-market” economies will be owned by the central bank?”

    I can’t imagine what such a world would look like (in a thought exercise). What happens as we move towards this state, which seems all but inevitable? Just theoretically, lets say 100% of the assets were on the balance sheet. Assuming that it is technically possible, what then?

    vickm

    12 Sep 13 at 10:12 pm

  2. They could deliberately do buy-ins to public Japanese companies to float their stock prices higher. Not that I’m totally serious about it, but it’s there.

    Maybe eventually all assets in capitalist “free-market” economies will be owned by the central bank? What could possibly be objectionable about such an economic system?

    It would make cutting taxes easier. You could replace them with sneaky tack-on licensing fees for using the assets!

    Brett

    12 Sep 13 at 10:23 pm

  3. vickm – I hope that we don’t get there and change course to something more sensible for macro-stimulus like helicopter drops.

    http://www.macroresilience.com/2011/10/05/a-simple-policy-program-for-macroeconomic-resilience/

    Brett – I would not at all be surprised if they move onto buying equities directly.

    Ashwin Parameswaran

    13 Sep 13 at 11:02 am

  4. As a thought exercise, I suggested at Scott Sumner’s blog that instead of a NGDP level target, the central bank target Nominal Net Worth (also a growth path and level target).

    My thought was that inflation was the growth rate of price level and price level targeting is considered better than inflation targeting. There is a perspective that GDP can be considered the growth rate of wealth, hence nominal net worth level targeting might work better than NGDP targeting.

    This thought is not backed by a model, but the policy will be very sensitive to asset bubbles.

    Coming to the post, I’m surprised that they are buying so many private assets. Have they completely run out of government bonds to buy? Is all of japanese gov debt held by the central bank?

    Prakash

    13 Sep 13 at 11:39 am

  5. Prakash – no they are buying JGBs as well. But in the BoJ’s own words:

    “With a view to lowering risk premia of asset prices, the Bank will purchase ETFs and Japan real estate investment trusts (J-REITs)”

    of course “lowering risk premia” = prop up private sector asset prices.

    ref: http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf

    Ashwin Parameswaran

    13 Sep 13 at 11:54 am

  6. Actually, the ‘one-trick pony’ is correct insofar as this bankers-school money system breaks down at the point of the saturation of debt-based money within the real macro-economy.
    Google up ‘when debt-money goes broke’.

    The only solutions out there are Adair Turner’s Overt Money Finance as in this paper from the Group of 30,
    http://www.group30.org/images/PDF/ReportPDFs/OP%2087.pdf

    or a complete reform that migrates away from the debt-based bankers-school of the money system and towards the debt-free money of the currency school.
    http://sovereignmoney.eu/currency-and-banking-teachings

    Take your pick.

    joe bongiovanni

    13 Sep 13 at 4:02 pm

  7. [...] “Maybe eventually all assets in capitalist “free-market” economies will be owned by the ce… [...]

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