David Beckworth has one New podcast With Ethan Iljetski, and it’s one of my favorites. At one point, David asks Iljetsky about the stance on monetary policy. A longer answer was provided—worth reading—but this part caught my eye:

My best guess about what we’ll see is that, for the most part, the shocks to monetary policy this past year will be, for the most part, negative declines in the Fed funds rate.

Iljetsky: And it’s a little sad because real interest rates have been rising this whole time. But our monetary policy shock system, I suspect, would say the opposite. Just to give you an example, I haven’t looked at the futures for today’s meeting yet, but the last FOMC meeting, the market was priced in, I think it was an 82 basis point increase. What this means is, because the Fed never moves by 82 basis points. So what does that mean? This means that some people were betting on a 75 basis point increase. Some were betting, took a contrarian view and said, I think the Fed is going to be tougher on the economy. So the monetary policy shock that happened on the day of the announcement was actually a reduction, very, very slight, but a reduction in interest rates because it was new news that they went for the expected 75, and not for that. Conversely, a shocking 100 basis points.

David Beckworth then points out that these things are difficult to measure:

Beckworth: And this is the eternal challenge of identifying macroeconomics. How do you truly isolate something caused by monetary policy that isn’t itself derivative or caused by some other development in the economy? So macroeconomists have their work cut out for them, no doubt. . . .

Quickly, monetarist theory states that the nominal quantity of money is relative to its real demand. Now, the point of the monetarist model is that we don’t observe actual money demand, we have to estimate it. It’s an observation. The New Keynesian model, the Phillips curve. And in the Phillips curve you have this thing called the output gap, which we don’t observe, you have to estimate it.

Beckworth: Now for the monetary theory of price level, they also have this problem. They know the net present value or the discounted present value of future actual primary surplus. So all three theories have this observable. To some extent they are difficult to falsify.

Like Iljetsky, I believe that fiscal policy in 2022 is quite ambiguous, although I focus more on NGDP growth than event studies. One thing we both agree on is that interest rates are a very unreliable indicator of the policy stance

I argue that the fiscal theory of the price level (which argues that fiscal policy is the dog and monetary policy is the tail), does not explain the phenomena of developed countries such as the United States. Iljetsky points out that the model also fails to explain the UK. Here he discusses the mini-crisis after Liz Truss took over as Prime Minister:

Iljetsky: And so if it was like an event in the bond market that fear the government would strong-arm the Bank of England into submission, we wouldn’t have seen what we saw. And coming to policy recommendations, the UK provides a great counter-example or a counter-argument that the bank should simply roll over and allow more expansionary policies. What I think it ignores is the strategic game between the Treasury and the central bank. We’ve seen the Bank of England stick to its guns saying we need to raise interest rates further because this monetary expansion is leading to more inflation. And it took almost three weeks for the Prime Minister to resign. So fiscal policy responds to reality and blinks first in this case. So at least 1-0 for financial dominance here in the UK and I hope it stays that way.

Financial dominance is both a desired state of affairs and the way the (developed) world actually works. God help us if we ever end up with financial hegemony like you see in Argentina, Venezuela and Zimbabwe. Imagine what would happen if we asked Congress to target 2% inflation!

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