Does the term structure of debt limit monetary policy?

by on May 2, 2012 at 7:06 pm in Economics | Permalink

Here is a superb piece from Jim Hamilton, hard to excerpt so read the whole thing.  Here are comments from Brad DeLong.

will May 2, 2012 at 9:04 pm

This is slightly wonkish. My naive translation:

Hamilton: At the zero lower bound short term US govt debt is equivalent to base money(reserves). Long term debt can be thought of as short term debt continually rolled over, except without the risk of changes in the interest rate at rollover time. It’s insensible to expect changes in the maturity of debt to affect the real economy. So why would an expansion of reserves influence the real economy in any significant way?

Delong: Slight boost to real economy from reduction of duration risk on safe treasury assets. “print money and buy stuff that is not now a perfect substitute for cash, and doing so in a way that keeps you from unwinding your purchases completely in the future” = boost inflation expectations that spur current spending.

JVM May 2, 2012 at 10:33 pm

This argument is complex but seems to obfuscate the reality of the situation. I’m not sure I’ve followed the argument, but he seems to somehow conclude that the fed does not control inflation or NGDP, which is silly. I think the error comes from a false equivalence somewhere in the third paragraph.

Unless I’ve greatly misunderstood, but I don’t think he provides an answer the following question:

If the Fed says they’ll print money and buy assets until NGDP is back on its 2008 growth path, would NGDP really not return to its growth path?

He seems to claim it is untrue, but then starts down a line of argument explaining how large-scale asset purchases is the equivalent of shifting the debt maturity of the fed’s assets. It seems like this equivalence is either false or misleading, since I think it’s pretty clear that the fed can provide exactly as much stimulus as it wants (as Sumner likes to say, they’re no shortage of ink). I get that there could be some awkward aspect of this in practice but that doesn’t seem to be quite what I’m arguing. Honestly it looks kind of like some really weird way of expressing the ‘zero lower bound’ fallacy.

Perhaps someone can explain where I have missed something?

Zachary May 2, 2012 at 11:49 pm

Maybe I am the only one who is scared sh*tless over NGDP targeting….

The term structure of debt does limit monetary policy. But it is not something to ‘fix’. It rightly reflects the lack of borrowing demand for short term projects and the highlights the unfortunately important role that financial and regulatory policy play (Unfortunate only because of who sets that policy).

Monetary policy can’t achieve all things and we shouldn’t try to make it do so. RGDP matters.

Doc Merlin May 3, 2012 at 4:52 am

Meh, I’m someone who believes in monetary policy ineffectiveness. I believe, at best, monetary policy can partially alleviate problems created by bad monetary policy.

Also, I suspect the treasury believes that intrest rates will rise and so is preferentially buying long term debt.

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