Comment on Chapter 2
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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 quo institutional arrangements are clearly deficient. The case for more closely coordinated monetary and fiscal policies, especially in liquidity trap circumstances, is clear at least to me. Yet it is fraught with tension, in part because of the near-holy belief in strict central bank independence within the macroeconomics profession. The technical matter of coordinated duration-risk management between the monetary and fiscal authorities is a good reason for getting these matters out of the cathedral . I applaud the authors of this chapter for furthering that cause.  COMMENT Stephen G. Cecchetti The quartet of Greenwood, Hanson, Rudolph, and Summers make two very important contributions that analysts and policymakers should keep in mind. First, in thinking about the impact of government bonds on the real economy , consolidate the actions of the central bank and the fiscal authority. So, if the purpose of policy is to change the duration of the publicly held sovereign debt, focus on what is privately held. (There is a small and technical question of how to handle government agency debt. But that does not obviate the authors’ important observation.) Second, assuming that debt managers are charged with financing their governments at the lowest cost possible, they should be issuing shorter than the U.S. Treasury typically does. The reason is pretty basic: the U.S. Treasury yield curve normally slopes up and the volatility of the short-term rate is not big enough to offset the advantage coming from this fact. This is something Debt Management Conflicts, U.S. Treasury and Federal Reserve 81 82 R. Greenwood, S. G. Hanson, J. S. Rudolph, and L. H. Summers debt managers in other countries seem to realize, as they often use interest rate swaps to reduce their duration exposure. That is, governments in some countries issue long in order to benefit from the liquidity premium that they receive for being the benchmark issuer, and then they swap short to avoid paying the term premium that comes from issuing long. There are, however, two points in this chapter on which I disagree. First, the authors assert that the Treasury’s preannounced and relatively mechanical lengthening of maturity to some extent neutralized the Federal Reserve’s quantitative easing program. My disagreement comes from the fact that market participants clearly view the Federal Reserve as the marginal participant in the government bond market—and a big one at that. After all, it is hard to disagree with the fact that central banks can set the risk-free short-term interest rate without actually having to hold any bonds and without concern for the actions of their debt managers. So, I would argue that it was (and is) the central bank’s actions that were setting the price and they can take full credit for the reduction in the term premium that we saw. Second, the authors recommend that, in order to avoid conflict between the monetary policy and debt management policy, there should be increased coordination between the Fed and the Treasury. The authors are careful to note that in the past, the discussion of fiscal-monetary policy coordination was framed in the context of the former instructing the latter—that is, in terms of avoiding fiscal dominance and avoiding high levels of inflation that tend to accompany it. Their recommendation has causality running the other way: increasing coordination so that the fiscal authority would do what the monetary authority wants. They are primarily concerned with the effectiveness of policy at the zero lower interest rate bound. That said, I question whether the creation of a coordination mechanism— something more formal than the regular dialogue currently in place— would serve us well in the long run. I worry that putting in place a governance structure that is designed to avoid conflict when the system is under stress would leave open the opportunity for abuse in normal times. If the Treasury is under some sort of obligation to follow the lead of the Federal Reserve in a financial crisis, why not the other way around during a budget crisis? My conclusion is that we should not change a system that works well almost every day so that it will...



Subject Headings

  • Debts, Public -- United States.
  • Finance, Public -- United States.
  • Fiscal policy -- United States.
  • Monetary policy -- United States.
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