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QE After Action Report

I think it is now possible to look back on the debate on the effectiveness of non-standard monetary policy at the (near) zero lower bound. I will now “mark my beliefs to market” – J B DeLong.

I think it is also a mildly worthwhile exercise, because it is relevant to the current debate about fiscal policy. A key argument for massive fiscal stimulus, well greater than any estimated output gap, is that making predictions, especially about the future, is harder than usual. This strengthens the usual argument that, as the Federal Funds rate is near zero, it is better for fiscal policy to be too stimulatory, because interest rates can be raised if the economy overheats but can’t be cut if it underheats. Given the huge uncertainty, there is a case for huge stimulus — maybe even more than the American Rescue Plan (as in maybe it’s time for an infrastructure bill and a family assistance bill). This argument would be invalid if stimulatory monetary policy were effective at the lower bound.

So was it ? The generally agreed extreme case of aggressive non standard monetary policy was Japan, where Haruhiko Kuroda vowed to do “Whatever it takes” to boost inflation. The Bank of Japan (BOJ) did things which the Fed absolutely is not allowed to d; it purchased stock (owning about 7% of market capitalization) . It declared a 2% inflation target which was explicitly a floor not a ceiling.

Of course it did not achieve this target. The only period of on target inflation was due to a 2014 3% increase in VAT which was in fact added to consumer prices. The declaration by PM Abe that he was really going to do this also caused an increase in expected inflation at the time Abe appointed Kuroda. This shows the power of fiscal policy *the VAT increase was followed by a recession).

Similarly annualized quarterly real GDP growth shows that “Whatever it Takes” March 2013 was followed by negative GDP growth in two quarters, then the sharpest downturn after the 2008 crash and before Covid 19 in four quarters. I don’t see how there could be stronger evidence that Fiscal policy trumps monetary policy when interest rates are at teh zero lower bound.

The evidence from the USA is similar