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Beckworth interviews Eggertsson

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David Beckworth has done a very interesting set of interviews with leading figures in monetary economics and related fields. One of my favorite occurred a few weeks ago when David interviewed Gauti Eggertsson. Eggertsson is a prominent monetary theorist, who has also worked at the New York Fed. This gives him an excellent vantage point to evaluate the past decade.

Since there is no written transcript, I'll rely on memory. Thus keep in mind these are not exact quotes:

1. Eggertsson expressed surprise that the Fed did not try for the sort of reflationary policies that FDR adopted in 1933. Recall that Bernanke once called on the Bank of Japan to show "Rooseveltian resolve", and specifically suggested ideas such as "level targeting." Both David and Gauti argued that level targeting could have been very helpful at the zero bound.

2. David pointed out that many central bankers were afraid of making the same mistakes as we made in the 1970s, (when, many would argue, we let the inflation genie out of the bottle.) Eggertsson responded (I paraphrase) "instead they made the same mistakes as in the early 1930s."

3. Eggertsson suggested that some central bankers seemed afraid that unconventional monetary stimulus could lead to an increase in risk premia, which would actually be contractionary. Eggertsson didn't seem to think much of that theory, and neither do I.

4. As in almost all conversations these days, talk eventually turned to Trump. Eggertsson suggested that if any idea has recently taken a beating it is the claim that uncertainty is recessionary. I've made that argument about Brexit, but Eggertsson was thinking of the uncertainty created by Trump. I think that's right, even today no one seems to have a good idea as to what sort of trade policy will eventually be adopted, or what will replace Obamacare. And yet stocks are soaring, suggesting that no recession is expected. I'm increasingly inclined toward the view that "uncertainty" is a lazy way of thinking about economic shocks. Economists are better off focusing on specific shocks, such as tight money, tax cuts, or an actual trade war.

5. At one point David brought up the idea of "helicopter drops", which is a metaphor used by economists for combined fiscal/monetary stimulus. Eggertsson asked how that's different from what Japan has been doing over the past 20 years. I've made similar arguments over the past few years.

Overall I thought it was one of David's best interviews. I expected to disagree with a good portion of what Eggertsson had to say, as he's certainly more Keynesian than I am. But I ended up agreeing with most of what he said, and also learned something from the way he thought about problems.

PS. My only regret is that David didn't ask him about Iceland, where Eggertsson grew up. They had a very severe banking crisis back in 2008, and used currency devaluation to cushion the blow.

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COMMENTS (6 to date)
Andrew_FL writes:
I think that's right, even today no one seems to have a good idea as to what sort of trade policy will eventually be adopted, or what will replace Obamacare. And yet stocks are soaring, suggesting that no recession is expected.

If stocks are rising, markets are smart, there will be no recession. If stocks are falling, don't worry, the market is stupid, there won't be a recession.

(I'd have linked here to one of the countless times you've talked about 1987 but you should well know what you've said.)

At one point David brought up the idea of "helicopter drops", which is a metaphor used by economists for combined fiscal/monetary stimulus. Eggertsson asked how that's different from what Japan has been doing over the past 20 years. I've made similar arguments over the past few years.

I could see Trump doing helicopter drops. There was that time he dropped Vince McMahon's money from the ceiling.

Finn writes:

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TMC writes:
Eggertsson suggested that if any idea has recently taken a beating it is the claim that uncertainty is recessionary.

Uncertainty is recessionary, but only one factor of the equation. The uncertainty of Brexit did no harm the UK's stock market because they thought it would be a net positive. That's why they voted for it. The uncertainty Trumps brings is that the worst probable scenario is no worse than what we've had for the past eight years. That's why he was elected.

People make choices even though there is uncertainty involved. They make them because they think the results will be better. The results would be even better if they were certain of the choice.

Scott Sumner writes:

Andrew, You need to read my posts more carefully, I never said there would be no recession.

And the markets certainly are not stupid.

TMC, There is no evidence that markets view Brexit as a net positive, and lots of evidence the other way. The pound has consistently fallen on Brexit news, and/or hard Brexit news.

The UK stock market also fell after the Brexit vote.

TMC writes:

FTSE100 is up over 7% in the past 6 months. UK is economically leading the EU. Only indicator that is negative is the value of the pound. Hopefully we fail as badly.

Scott Sumner writes:

TWC, I assumed you were looking at the immediate impact of the Brexit vote on the market, which is the normal way to do event studies. The US stock market is also up sharply, is that due to Brexit?

And the FTSE100 is the very last index anyone should be looking at when evaluating the impact of Brexit, it is heavily dominated by multinationals, which gained when the pound depreciated sharply.

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