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COMMENT Paul McCulley This chapter is a rich contribution to the growing literature on the optimal monetary-fiscal policy mix in liquidity trap conditions. Our profession has for too long ignored this field of inquiry, presuming that Thomas Sargent was correct when he proclaimed that macroeconomic analysis and policymaking had advanced sufficiently to render study of liquidity trap exigencies to be of little usefulness.19 If only that were true! But it isn’t, as evidenced by the harsh reality of liquidity traps in all major countries since the Minsky Moment of 2007–08. I am happy to be part of this burgeoning literature.20 I start with the proposition that Ben Bernanke was right when he poignantly argued, in 2003, with reference to Japan’s self-evident liquidity trap: It is important to recognize that the role of an independent central bank is different in inflationary and deflationary environments. In the face of inflation, which is often associated with excessive monetization of government debt, the virtue of an independent central bank is its ability to say “no” to the government. With protracted deflation, however, excessive money creation is unlikely to be the problem, and a more cooperative stance on the part of the central bank may be called for. Under the current circumstances, greater cooperation for a time between the Bank of Japan and the fiscal authorities is in no way inconsistent with the independence of the central bank, any more than cooperation between two independent nations in pursuit of a common objective is inconsistent with the principle of national sovereignty.21 At that time, Mr. Bernanke was primarily preaching. After the Minsky Moment, as Fed chairman, he practiced his own preaching in extraordinary and courageous fashion. He led the Fed to use its powers to transfer 19. Sargent and Wallace (1981). 20. McCulley and Pozsar (2012, 2013). 21. Bernanke (2003). Debt Management Conflicts, U.S. Treasury and Federal Reserve 79 80 R. Greenwood, S. G. Hanson, J. S. Rudolph, and L. H. Summers interest rate duration risk from the private market to its own balance sheet— essentially swapping newly created reserves of zero duration for long-dated Treasury (and related agency) notes and bonds. The Fed’s maneuvers were not, it is important to stress, of the nature of a “helicopter drop,” as Bernanke discussed in 2002: In practice, the effectiveness of antideflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities . A broad-based tax cut, for example, accommodated by a program of open market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. . . . A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.22 And, in my view, it is regrettable that the Fed’s massive balance sheet expansion in the half decade following the Minsky Moment was not explicitly the result of an accord with the fiscal policy authority to pursue extraordinary , and sustained, fiscal expansion. Such explicit cooperation between the monetary and fiscal authorities—which Bernanke advocated to Japan in 2002 and which now is being employed in that country—would have generated a more robust, a more equitable, recovery than the one the Fed has been able to nurture largely alone. But near-religious belief in the doctrine of central bank independence in our profession has served as a major obstacle to fruitful—even polite—debate about a more optimal monetary-fiscal policy mix. The Fed was left to fight the liquidity trap via asset price reflation grounded in exploiting what the late Rudiger Dornbusch described as rational overshooting—namely, that prices on Wall Street move much more quickly than prices on Main Street.23 A key aspect of this approach has been reducing long-term Treasury (and related sovereign-backed) interest rates so as to reflate all long-dated (perpetual) private sector assets. Thus, Greenwood, Hanson, Rudolph, and Summers are surely correct that it makes no economic sense for monetary and fiscal authorities to act at cross-purposes in the debt management arena when the explicit objective 22. Bernanke (2002). 23. McCulley (2014). of the consolidated entity is to lower the yield of all long-duration assets . The implementation of this objective should be a technical matter, regardless of one’s view as to the wisdom of the government deciding to pursue this objective. The authors provide a robust framework for addressing this implementation question. Status...


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