Do We Need all this Expectations Hoodoo?

To be fair to Woodford, some actions are ambiguous where clearly stated intentions about future actions would not be.

But Woodford's diagnosis of QE2 is wrong. As you say, paying 25 basis points on excess reserves is a disincentive to putting the money to work. Even worse is buying T-bonds, which play an active role in financial intermediation, with newly created idle reserves. Woodford thinks banks will not put the reserves to work if they know that in aggregate the fed will withdraw excess reserves once the economy picks up. This is unpersuasive.

This is a bit like the statistical pile-up problem. There can be multiple policies governing future actions consistent with today's, so being explicit about your plan can help markets understand what you are doing. On the other hand, retaining interest rates on reserves suggests that we haven't actually made rates as low as we could. This raises the possibility that the Fed may not wish to have rates any lower., In that case, it isn't a communication problem but one of intentions.

This is going to inspire me to write a post some day. About how all monetary policy is really just words. Money itself is just words on a bit of paper. Or keystrokes on a computer. And none of it means anything really, except that we choose to believe it, and choose to act in response to those ink-marks and keystrokes.

In fact, the whole market economy is really about just words. Exchange is just words: "You can have it for $5"; "Done!". The physical actions follow later.

Property rights are just words too. The judge says "Google owns that copyright", and next thing you know a lot of actions change too.

Even silent barter is really just unspoken words. They left those yams on the beach. Did they *mean* by that action that they are offering those yams for sale?

Nick, your post is just words.

Yes we do! Entrepreneurs need to be able to predict future policy. Better to have consistent 3% inflation than 0% or 6% with 50% probabilities. Central banks need credible commitment devices as well, but they do exist.

Who would trust our benevolent leaders if they were claiming to speak directly?

They told us The Fundamentals Are Sound in the housing market, right up until the crash. Does anyone think they believed this?

They have told us continually for the past three years that the recession is now over. Green shoots and all of that.

Telling us they want banks to start lending and then paying the banks to hold reserves is another good one.

God alone knows what really happened with the TARP guarantees and "repayments" and the money shell games they were playing back then. But it was clear they were obfuscating the truth as hard as they could.

Really, who believes these guys? If you take anything they say at face value, you're a sap.

James, how could Bernanke et al credibly commit to (say) 3% inflation over the next ten years? If you have a realistic mechanism to demonstrate committment, I'm very curious.

The mechanism is that he, and the Fed as an institution, would find it extremely embarrassing to renege.

Arnold, I asked Scott Sumner this in comments and he (self-admittedly) dodged the question:

If the Fed, tomorrow, dropped IOR rates to zero or even negative, what would you predict the effects to be on:

Inflation
NGDP
Unemployment

I'm really not questioning or challenging either of you. I'm curious to know what you think.

We're in an unusual situation right now, of course, with all those excess reserves and big treasury holdings by the Fed. So the question is really related to this particular moment in time.