Think the unthinkable
14 February, 2013 at 11:51 | Posted in Economics | 1 Comment
As Adair Turner, chairman of the Financial Services Authority, argued in an important lecture this week, even greater attention needed to be paid to the “how” of monetary policy in exceptional times than to its targets. In particular, he argued, money creation was a legitimate and powerful tool, in such circumstances …
I agree with Lord Turner that the even more important question is how to make any policy effective. This, inevitably, raises questions about how monetary policy works in an environment of ultra-low interest rates. Lord Turner thinks the unthinkable: namely, monetary financing of the fiscal deficit. So should policy makers. They have to think afresh. If not now, when?
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As Turner rightly points out in his speech, helicopter drops (i.e. just having government print money and spend it in an recession) is old hat. Milton Friedman advocated the idea in 1948. Turner could have added that Keynes advocated the idea in the early 1930s.
Also I’m not sure about Martin Wolf’s claim that “this inevitably, raises questions about how monetary policy works in an environment of ultra-low interest rates”.
Helicopter drops simply amount to merging monetary and fiscal stimulus. And personally I think that that “merge” makes sense REGARDLESS of whether we have low interest rates or not. That is, it strikes me that the very concepts “monetary policy” and “fiscal policy” should be permanently banned, and merged into “helicopter drop”. I’ve set out reasons here:
http://ralphanomics.blogspot.co.uk/2013/02/professional-economists-are-tumbling-to.html
Comment by Ralph Musgrave— 18 February, 2013 #