The papers presented today (Day 1) at the Jackson Hole monetary conference by academics outside the Fed revealed considerable skepticism about the effectiveness of the Fed’s quantitative easing and forward guidance programs. Of course Fed officials did not express the same doubts. Here is a quick summary of the papers.
The first paper was by Bob Hall, my colleague at Stanford. It argued that neither quantitative easing nor forward guidance was effective, or as he put it, “Both quantitative easing and forward guidance, as implemented by the Fed, are obviously weak instruments.” He went even further saying, in reference to the large increase in reserves to finance quantitative easing, that “An expansion of reserves contracts the economy,” in the current situation when interest is paid on reserves. He is skeptical of forward guidance because he does not think promising to deviate from a policy rule with extra low interest rates in the future is credible. It’s “hard to accomplish.”
Bob he also warned that nominal GDP targeting had serious problems, referring to his research of 20 years ago with Greg Mankiw. And instead of raising the target for inflation, going forward he argued that central bankers should focus on requiring more capital at banks and more rigorous stress testing.
Hyun Shin of Princeton discussed Bob Hall’s paper. Hyun was extremely doubtful that forward guidance was effective in bringing down longer term interest rates. His reasoning is that the expectations model of the term structure–which forms the theoretical underpinning of forward guidance–is a weak theory to lean on.
The second paper was by Arvind Kirishnamurthy and Annette Vissing-Jorgenson. They argued that the Fed’s large scale Treasury bill purchases had little “portfolio balance” impact on other interest rates and was not in itself a macro stimulus, though they found an impact of the MBS purchases. Their work is based on announcement effects, which may not reveal the full effect of the policy.They also criticized the Fed for not having a clear policy rule or strategy for asset purchases.
We will see what Day 2 brings.