Did the zero lower bound matter?

This is an article of faith in “Twitter economics,” but Scott Sumner, myself, and many others have been insisting for years that the arguments simply are not there and that the zero lower bound is not such a big deal.  There is now a new NBER working paper by Davide Debortoli, Jordi Gali, and Luca Gambetti:

The zero lower bound (ZLB) irrelevance hypothesis implies that the economy’s performance is not affected by a binding ZLB constraint. We evaluate that hypothesis for the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of performance that were likely to have experienced the impact of a binding ZLB: (i) the volatility of macro variables and (ii) the economy’s response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint, possibly as a result of the adoption and fine-tuning of unconventional monetary policies. We can reconcile our empirical findings with the predictions of a simple New Keynesian model under the assumption of a shadow interest rate rule.

In my somewhat jaded view, the zero lower bound arguments have been an excuse of sorts to move outside of “scarcity economics” and make politically convenient claims about the necessity fiscal stimulus.  It is no wonder we ended up with MMT!

In the meantime, this evidence is the (current) final word, and I hope it will be heeded as such.


Not sure this is such a big win for your team, Tyler. Wren Lewis, Krugman et al said the zlb plus lack of stimulus was a problem because effects of unconventional monetary policy were unclear. And they were, and still are unclear (surely no eould argue this?) So this might be some evidence for unconventional monetary policy working.

We also still had a terrible recovery and, with little inflation, so it's hard to argue the otherside's ignoring scarcity, no?

That the recovery was ‘terrible’ is also an article of faith.

How so?

The recovery gave me a big boner. A whole 2 inches hard.

Like many things the economy is cyclical and the cycles are not consistent in their length, depth, height or frequency. The problem is that a economic downturn or collapse is undesirable and it inevitably leads to politicians trying to alter/fix it with money and regulations. The correct solution would be to allow it to run it's course and correct itself vs propping it up with the inevitable result that the props remain in place and the underlying problem remains in place as well. A better response would be laissez faire.

So your argument is, a. the economy's cyclical b. therefore cycals should be allowed to run their course?

I’m a Cuck😀

If cycle are endogenous, the only manipulation is to move them farther out on the curve and expense the cycles as needed. The cycle re endogenous, in fact the cycle is law, written into that hard bound constitution called right to coin; always there, always cyclic.

The Fed hasn't mattered since the bailouts. Perhaps for the better.

Maybe if the Fed waited to stop bailing after it bailed out Lehman Bros. . . .

Too Big To Bail? Maybe Bernanke could write a third book and explain why the Fed bailed-out bankrupt investment bankers/brokers (they were not Fed member banks, were not FDIC-insured banks) and did not bail Lehman or 400, or so, banks that failed, and were liquidated, in the years after 2008.

That's precisely why you guys and girls need to nominate Pete Buttagieg for POTUS. "What Me Worry?"

'This is an article of faith in “Twitter economics,”'

Isn't the real article of faith that there is such a thing as “Twitter economic”?

And isn't the real conclusion that it is no wonder we continue to pile up endless federal deficits?

The equivalent shadow curve portends some 15 years of tax and sequester. It is exactly the shadow curve we are trying to escape.

I might add, if official central banking is working then why is it using the treasury curve not the shadow curve? The correct version is the shadow.

or inflation? One year of 5% inflation reduces the real debt burden by more than $1 trillion.

@BD - "One year of 5% inflation reduces the real debt burden by more than $1 trillion" - no it doesn't. Coase's theorem tells us society gets no net benefit. If the creditor loses, the debtor gains, net zero, and vice versa if the creditor wins, the debtor loses, leaving no gain to society. Your bogus assumption is based on the Keynesian fallacy that the deadbeat 99% spend more than the saving, investing 1%, but this empirical fact presupposes that spending now is better than investing for the future, a serious fallacy in Keynesian economics that glorifies the status quo at the expense of a better future.

Did you even get 1% of that? Speaking as a member of the 1%, which you will never be, BD.

😆 You’ll never have a dick even 1% as long as mine!

Right, inflation raises rates, but we do not suffer inflation.

"[Responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint, possibly as a result of the adoption and fine-tuning of unconventional monetary policies". "Hardly" affected, "as a result of . . . unconventional monetary policies". Not exactly a ringing endorsement of the fiscal stimulus naysayers. Monetary stimulus and fiscal stimulus are redistributive, the difference is that the former is redistributive upward while the latter is redistributive downward. Is it any wonder why it's a fight to the death over which to adopt. We are far too reliant on rising asset prices for prosperity: it discourages real economic growth generated from investment in productive capital, it encourages asset bubbles, and it adds to an already high level of inequality. But at least the Fed is not political, right? If the sight of Jerome Powell cowering to the fat man with a Twitter account in the White House isn't enough to stimulate one's skepticism, nothing will. Of course, the irony is that the fat man is risking an all-out trade war and economic armageddon because of fiscal stimulus, China's fiscal stimulus, which the fat man and his sycophants are demanding China cease and desist because it gives China an unfair advantage.

I too am not sure Trump stumping to slow rate increases was correct.

Since 2008, the rest of the World has kept negative and zero rates while US FOMC levitated US target short interest rates from 0.25% to 2.5% beginning December 2015. The EU gets 0.4% GDP growth, the US 3.2%. Go figure.

Obama got $900 billion stimulus. It flopped. He says they couldn't find shovel-ready projects. I say it was incompetence, wrong-headed policies, and all the president's horses and men could not find the magic wand.

Obama had eight years. He accomplished relatively less for employment, GDP growth, asset markets, etc. than two or three Trump Tweets.

More like Trump has benefited from jumping onboard the Obama Economy Train. God help us when we arrive at the next recession, because a few tweets are not going to do anything. I will credit the President with a positive development in terms of convincing Moore, Congressional Republicans, and the other inflation hawks of the Obama years to finally shut up. But my guess is that they have revealed themselves to be sycophants more than they have experienced an actual change of heart. But here's hoping I'm wrong.

You could be correct.

"Those who cannot remember the past are condemned to repeat it." George Santayana

Ancient History. By June 2006 (CNNMoney reported), the Fed had raised short rates 17 times (desultory beginning January 2001) to a target of 5.25%. In 2019, seems Trump tweets curtailed Chmn. Powell getting to 5.25%. I'm so old I remember 2008.

The next recession (by July? this recovery - though anemic - will become the longest expansion since WWII) will be longer and deeper because (Trump tweets!) forbade the Fed raising short rates high enough ergo central planners do not have the arrows in quiver, 5.00% (it's only 2.50%) needed to cut rates and save the recovery. It could be even more direrer in Japan and the EU where rates are zero or below.

There was one evil, inflation hawk/Nazi/racist Fed, short rate target hike under Obama, in December 2015 (why Hillary lost?), from 0.25% to 0.50% (all the other Fed rate levitations - to 2.5% - occurred after the November 2016 election).

Orange Man Bad! I needed to add that for you.

There is a lot of evidence that unconventional monetary policy can be effective, as people like Sumner said ahead of time.

This may come as a surprise to readers who don't know history, but Steve Jobs envisioned creating a manufacturing mecca in Silicon Valley, much like Henry Ford had made one in Detroit. What he learned was that Silicon Valley does not have a manufacturing culture: it has a soft(ware) culture. Upon his return to Apple in 1997, Jobs hired Tim Cook to create a supply chain in Asia to manufacture Apple's products. Cook had done the same at IBM and Compaq. The boy wonders in Silicon Valley have talent, but not the talent to build hardware, as was evident recently when they tried to build a car for the driverless software, an effort soon abandoned as impossible in the soft(ware) culture of Silicon Valley. https://www.nytimes.com/2018/12/15/business/apple-california-manufacturing-history.html

"What he learned was that Silicon Valley does not have a manufacturing culture:" Translation: did not have a population willing to work of $0.15 an hour.

Today's paper: "We focus on two dimensions of performance that were likely to have experienced the impact of a binding ZLB: ... Using a variety of empirical methods, we find ... that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint"

On Allan Stockman (deceased): "Unfortunately, the implied tight link between consumptions (or outputs) and exchange rates was a dead end empirically, as underlined by the later literatures on the exchange-rate disconnect and the consumption-real exchange rate anomaly. Alan’s 1989 JME paper with Marianne Baxter, “Business Cycles and the Exchange Rate Regime,” is one of the fundamental contributions to the former literature"

Conclusion: money is neutral, and the only 'macro model' that works is "stuff happens". Actually even microeconomics is flawed, e.g., cobweb model of prices, Giffen goods, Veblen goods, market for lemons, etc etc etc. All of economics is exceptions to the rule.

That is great last paragraph, sir.

Mostly correct. Economists fouled pricing theory, interest rate theory and inflation theory. There is one tiny school of operations research that nailed the entire macro calculations, aggregating agents do not like waiting in line. Congestion theory, never found a science where congestion did not explain it, though it is not always calculable.

Ray Dalio advocates MMT.


My guess, and that of Dalio, is helicopter drops become inevitable. See Japan.

MMT does not have to be free money for social welfare programs. That is a cheap shot.

MMT can be money-financed tax cuts. (I see some ears perk up).

Besides, if helicopter drops are effective in beating recessions without making too much inflation, what is the point of sticking with QE? Is there some point of honor?

Does QE work? Japan? Really? The St Louis Fed said in the US QE would have had to be four times larger to have much impact.

That is, QE might not work at levels the financial community will tolerate.

Also, banks have trouble making money at negative interest rates. And you want banks to lend to beat a recession, not retreat.

Send in the choppers!

Dalio hasn't advocated for MMT. He's simply stated that it will now probably happen. IMO his implication was that we've come this far on stimulus money that it's unlikely we can ever turn back without self-inducing some sort of recession.

MMT can't be policy. It is simply a description of how our monetary system works. You may find the description flawed (all models are wrong, some are useful), but you cannot find the prescription flawed, because there is none.

Some logical conclusions once you understand our monetary system are a job guarantee, elimination of FICA (employer & employee), getting rid of the debt ceiling and implementing a carbon tax, but these are based on the preferences of the majority, which you are not likely to share.

Benjamin Cole contributed the most intelligent comment so far.

Whatever makes Tyler and his cuckold followers shit bricks works for me!

No. Everything they say is either obvious and without insight, or completely incorrect.

I don’t want to waste too much time debunking a theory of idiots. But the gist of the theory is that Venezuela would have fixed their inflation problem via higher taxes. Yeah...

You’re literally retarded. You should affix that to your resume.

This is who we are dealing with, by the way. This magical thinking sheer low IQ idiocy. Trump and tariffs, Liberals and MMT. Both sides refuse to deal with reality.

Maybe the fate of full suffrage is mass starvation, genocide, and 1984.

To quote Issa, and yet, and yet.

I hope MMT becomes mainstream and gets implemented as policy - not because I think there’s something too it but just because it will make Tyler upset. I’d like to see the steam shoot out of his ears when the first pro-MMT Chair of the CEA is announced.

That was one of the most boring sentences to ever include an exclamation mark. Chill, TC.

No YOU chill! I'm sick and tired of getting bullied around on Twitter by Krugman, Summers, and the rest. Once they read this paper the big boys will have to respect me!

I like it that the paper authors only focus on two dimensions.,: " We focus on two dimensions of performance that were likely to have experienced the impact of a binding ZLB: (i) the volatility of macro variables and (ii) the economy’s response to shocks." And ignore unemployment and capacity..

Pick and choose.

The only two dimensions that matter are length and forth every economist knows that!
Economists do it with models!

Not magnitude, cost to individuals, lost lifetime opportunities. If you think of an economy as a dynamic system, with individual in it, you would not confine yourself to models, but rather human beings, whose lost future income from not having that first job counts.

Come back and say that lost individual first job opportunity does not matter,/

By the way, I think you are not Tyler Cowen but simply an imposter based on the comment you made and how it does not track what real economists say.

By the way, imposter Tyler Cowen, go ask Japan what it felt like.

I think you are wrong here Tyler.

The ZLB is very significant. This is some Trumpy logic you are using here. And by trumpy i mean.. a total lie based on some emotion you WANT to be true. So are you saying that FREE MONEY does not hyper incintivize companies to take risks/invest and give them an avenue to patch up the wounds they earned during the financial crisis???? I mean... are we really saying that basic interest rate economics are not relevant at the macro level?? How can any serious economist say this??????

I guess in a time where the president believes a trade deficit equates to "losing money" or "being ripped off," this type of logic passes.

But inwill be the first to say....not today, Satan. Zlbs are significant. Always.

Businesses cannot actually get "free money" so your comment is a non sequitur. It's not like companies are issuing bonds with 0% interest. Even if they were, with deflation it's still not "free"

Excellent comment section for reading while taking a dump

I thought this selection of comments was the dump.

I print out this blog to use as toliet paper

If I get this zero lower bound argument it is something like:
A: Something happens at 0% rates. Negative rates are either impossible to really achieve or behave differently macro economically.

B: Nothing happens at 0%. Going from 2% rates to -1% rates is no different than 7% to 4%. You're just moving along the number line and 3 units is 3 units whether or not you cross a 'magic number' like 0.

What does this have to do with MMT though? MMT, from what I'm getting, says that the economy is less prone to inflation than is often thought and monetary policy should be aggressive enough to ensure full employment and growth first.

It seems to me either A or B could be true while MMT also remains true. That being said negative numbers are not the same as positive ones. Perhaps -1% versus 1% isn't all that different than 4% versus 6%. Perhaps your car can run on regular gas as well as premium but it doesn't mean it can also run on diesel. I'm not sure -5% could work just as smooth as 5% rates.

The curve shifts right, leaving the left side at zero for tax dollars. We get the result in situations, like now, when interest charges are rising faster than debt. Congress has no short term liquidity, small states cannot insure their small goodies over the year and so small states stop Congress, cause shutdown. Eventually we realize that Congress is cyclic, endogenously, the economist apologize for faking it, then we do a devaluation. After the devaluations, economists claim they have solved the problem. Wash rinse and repeat, once per generation. It is in the history charts since the founding.

The shadow curve does not show this, the shadow curve shows everything at it would happen without the default, namely extreme tax and sequester..

The shadow curve is when a blackman pulls out his cock in sunlight

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