Afternoon Must-Read: Simon Wren-Lewis: On the Monetary Offset Argument

Simon Wren-Lewis explains better than I ever have why the Market Monetarist and other arguments that fiscal policy at the ZLB is unnecessary partake 100% of the how-many-angels-are-dancing-on-the-head-of-this-pin nature…

Simon Wren-Lewis:
On the Monetary Offset Argument):
“A number of us are highly critical…

…of moving to austerity so early in the recovery from the Great Recession. Market Monetarists… argue… the ZLB is not a problem…. I want to make a couple of observations. First, MM often [wrongly] imagine that they invented this offset argument…. Second, if you… want to take the MM argument seriously, you have to believe that monetary policy is [as] capable of offsetting the impact of austerity as much now as later… [and] that this is actually what monetary policy makers will do. If you believe the first, but are not sure about the second, then fiscal consolidation now is a mistake…. [This] exposes how weak the MM argument is at the ZLB…. Central banks at the moment are inflation targeting, and are likely to continue to do so, so enacting fiscal contraction in the hope that they might change is highly irresponsible. So the MM argument that the ZLB does not matter has to rely on Quantitative Easing (QE). But here there is a basic problem that MM has never to my knowledge answered. Just how much QE do you do to offset any fiscal contraction? We have no real idea, because we have so little experience…