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Is Scott Sumner Reality Based ?

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March 25, 2011 by  

Scott Sumner wrote

If pressed, Keynesians will usually point to real interest rates as the right measure of monetary ease or tightness. By that criterion the Fed adopted an ultra-tight monetary policy in late 2008. Monetarists will usually say that M2 is the best criteria for the stance of monetary policy. By that criterion the ECB adopted an ultra-tight monetary policy in late 2008. And yet it’s difficult to find a single prominent macroeconomist (Keynesian or monetarist) who has publicly called either Fed or ECB policy ultra-tight in recent years. Maybe tight relative to what is needed, but not simply “tight.”

To me this means that he claims that US real interest rates have been high “in recent years”. Of course he also says “in late 2008” but suggests that the real interest rates then were a policy choice and that the policy continues.

In fact real interest rates in the US are extraordinarily low. The 5 tear real interest rate is negative. I think Sumner made a definite claim about published numbers which is definitely false.

Sorry I don’t know how to embed Fred graphs. Please click this link.

I added the chart for you — spencer

update: thanks spencer. Also I have added the link to Prof. Sumner’s post.

More after the jump.

I’d say he is crazy and delusional. Basically, I’m convinced that his methodolical a priori is that everything is determined by monetary policy. Since unemployment is high, he claims US monetary policy is tight. I think you quoted a declaration of religious faith and not a description of reality.

I don’t agree with Sumner’s claim about Keynesians. In fact Keynesians follow Taylor (a Republican hack and new Keynesian) and evaluate monetary policy by comparing the federal funds rate to the level given by a Taylor rule. The absolutely standard view among Keynesians is that the loosest possible monetary policy occurs when the federal funds rate is essentially zero. This explains why all Keynesians agree that US monetary policy has been very loose since the crisis began.

Note the careful qualifier “late 2008.” He has picked a cherry. In particular in late 2008 world financial markets were in a total panic with a desperate race for liquidity. This drove up the price of normal nominal treasuries and drove down the price of any asset with a thinner market (that is all other assets). This was not a shift in monetary policy (just as no Keynesians would call it a shift in monetary policy). It was also very brief.

The current 5 year real interest rate in the USA is negative. Real interest rates are extremely extremely low in the USA. But Sumner will not allow facts to weaken his absolute faith, so he decided to ignore all evidence from 2009, 2010 and 2011. He just talked about a brief spike about which neither the Fed nor any other entity could do anything.

He tried to write something which was technically true, but he slipped up. I quote with a totally fair elision

“By that criterion the Fed adopted an ultra-tight monetary policy in late 2008.
late 2008. … Fed … policy ultra-tight in recent years.” Late 2008 is not years recent or otherwise. It is part of one year. Sumner’s absurd claim is based on describing a few months over two years ago as “recent years”. Basically he claims that because real interest rates were briefly high years ago (during a panic) they are high now.

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