Could it be that New Keynesians and Market Monetarists can
converge on a common policy proposal? I really like David Beckworth’s Insurance
proposal against ‘incompetent’ monetary
policy. Here it is.
1) Target the level of nominal GDP (NGDP)
2) “the Fed and Treasury sign an agreement that should a
liquidity trap emerge anyhow [say due to central bank incompetence] and knock
NGDP off its targeted path, they would then quickly work together to implement
a helicopter drop. The Fed would provide the funding and the Treasury
Department would provide the logistical support to deliver the funds to
households. Once NGDP returned to its targeted path the helicopter drop would
end and the Fed would implement policy using normal open market operations. If
the public understood this plan, it would further stabilize NGDP expectations
and make it unlikely a helicopter drop would ever be needed.”
In fact I like it so much that Jonathan Portes and I proposed
something very like it in our recent paper. There we acknowledge that outside the Zero Lower Bound (ZLB), monetary policy does the stabilisation. But we also suggest that if the
central bank thinks there is more than a 50% probability that they will hit the ZLB, they get together with the national fiscal council (in
the US case, the CBO) to propose to the government a fiscal package that is
designed to allow interest rates to rise above the ZLB.
There we did not specify what monetary policy should be, but
speaking just for myself I have endorsed using the level of NGDP as an
intermediate target for monetary policy, so there is no real disagreement
there. A helicopter drop is a fiscal stimulus involving tax cuts plus
Quantitative Easing (QE). Again we did not specify that the central bank had to
undertake QE as part of its proposed package, but I think we both assumed that
it would (outside the Eurozone, where for the moment we can just say it
should). I think a central bank could suggest that an income tax cut might not
be the most effective form of fiscal stimulus (compared to public investment,
for example), but let’s not spoil the party by arguing over that.
Now this does not mean that Market Monetarists and New
Keynesians suddenly agree about everything.
A key difference is that for David this is an insurance against incompetence by the central bank,
whereas Keynesians are as likely to view hitting the ZLB as unavoidable if the shock is big enough.
However this difference is not critical, as New Keynesians are more than happy to try and improve how monetary policy works. The reason I wrote this post was not because of these differences in
how we understand the world. It was because I thought New Keynesians and Market
Monetarists could be much closer on policy than at least some let on. I now
think this even more.
