Randomized monetary policy

Felix Salmon writes:

One alternative approach would be to consider it to be the job of the Fed to minimize the severity of the worst possible
recession. What would happen if, for instance, rates were set using a
random-number generator? Every FOMC meeting, some kind of virtual die
would be rolled, moving rates up or down even if that was the opposite
of “correct” monetary policy. The resulting uncertainty would force
people to take a more defensive stance at all times, just in case rates
went sharply upwards – even if the probability of such a rate hike was
quite low.

Some Austrian wise guys out there might claim this is what we had for a while or maybe they think it is what we have now.  Alternatively, if returns on gold are a random walk, does not a commodity standard give you a version of this, if only for medium-term changes in the price level?  Random taxation of risky investments could produce comparable results.


Reminds me of prescribed forest fires.

It's not only Austrians that believe market action drives data, to a degree.

It is Austrians that snicker at the idea that our current problems result from too LITTLE control over the economy, and then look out in disbelief that this is in fact the prevailing conclusion.

We used to have an economy with highly variable and often negative rates of return. It was called farming. Major randomizers were weather and disease. In 1850, it represented 40% of US GDP and 60% of US employment.


Did we have a less risky economy back then? I think not.

Since we are getting fundamental, it is worth remembering that:
- an entirely certain monetary policy (if one can be defined) creates one-way bets, and is therefore impossibly costly;
- an entirly uncertain monetary policy is also pretty costly, and creates corresponding pressures to depart from it.

Which raises the question of what is monetary policy for? If it is for regulating demand in the economy via interest rates, there is at least a possible case that a fiscal policy with tax rates that can be varied quickly with virtually immediate effect (the sort of thing the British in 2008 did by cutting their Value Added Tax to boost demand)could do that without monetary policy.

I am an old government economist who has observed that it is deeply unrealistic to expect any policy instrument to work as well as it should. To minimize the extent to which our policy will go wrong, I therefore favour a mix of some uncertainty about next month's interst rates and some about next month's tax rates.

Monetary policy is undoubtedly about influencing the general trend of prices in the economy. Varying a broad consumption tax has similar effects on some inflation indicators. However monetary policy (even when it is targetted on consumer price indicators) also works through its effect on asset prices. A quickly variable tax, or a discretionary regulatoy surcharge, on risky asset prices would offer a complement to monetary policy parallel to a broad based, rapidly variable, consumption tax.

What we really need is a Federal Shoe Reserve, and the "correct" number of shoes to be produced should be determined by a random number generator.
And then a Federal Housing Reserve, a Federal Food Reserve, and then, hey Dorothy, are we in Kansas, er Moscow, yet?

This post has done a nice job of flushing out a few of those Austrian wise-guys.

Why be defensive just for the sake of being defensive? Why force people into being unnecessarily defensive... defensive beyond what the market itself would dictate?

maybe the fed should try to make the volatility of interest rate moves constant, not manipulate the interest rates themselves.

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