Wednesday, June 23, 2010

Appoint Scott Sumner to the Jedi Council

Apparently, he's even able to take Master Obi-wan (aka John Cochrane) down on occasion. A few tidbits:
Cochrane is comparing an outdated monetarist model where current monetary policy drives current and future AD, with a sophisticated fiscal model where current AD is driven by future expected deficits. But that’s not fair. We have known for a long time that it is future expected monetary policy that drives current AD. The fact that money and T-bills are now almost perfect substitutes does not in any way inhibit the Fed from targeting the price level (unless you assume that the liquidity trap will last forever.) Believe me, when T-bill rates get up to 2% or 3%, then non-interest-bearing reserves will not be considered perfect substitutes for T-bills, demand for excess reserves will fall almost to zero, and the Fed will have its usual ability to control the price level path that comes from its position of being the monopoly producer of the stuff we carry around in our wallets. I don’t plan on carrying T-bills to go shopping at Wal-Mart. The quickest way to get out of the liquidity trap is to target a much higher NGDP growth path than what is currently expected. That will dramatically lower the demand for base money.
I think he is grasping for straws here. If you want a relatively direct take on inflation expectations you look at TIPS spreads and CPI futures markets. Real gold prices are distorted by massive Asian demand.

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