Must-Read: I would say that if monetary policy makers wish to place limits on what can be expected from monetary policy, they need to also be making loud and constructive arguments about what will do the stabilization policy job if monetary policy is not going to push the envelope. I don’t think Plosser ever made loud and constructive arguments directing other policy makers to do a constructive job…
: On Summers: My Views and the Fed’s Views on Secular Stagnation: “The Fed’s job would have been, and will be a lot easier if fiscal policy makers would help…
…I disagree with Charles Plosser’s view on monetary policy, but I have some sympathy for the view that many people have come to expect too much from monetary policy:
On the monetary policy side central banks have clearly pushed the envelope in an effort to stabilize and then promote real economic growth. The pressure to do so has come from inside and outside the central banks… raised expectations of what the central bank can do…. It is not clear that this is wise or prudent. Many have come to fear that without substantial support from monetary policy our economies will slump into stagnation. This would seem to fly in the face of nearly two centuries of economic thinking…
If secular stagnation is real, the Fed cannot overcome it by itself. Fiscal policy will have to be part of the solution…. Monetary policy — and fiscal policy too — can have a permanent impact on the natural rate of output by helping the economy to recover faster. The faster the recovery, the less the natural rate is lowered. So I agree with Summers that monetary policy needs to take the possibility of secular stagnation into account, I just wish he’d put more emphasis on the essential role of fiscal policy — something he has certainly done in the past, e.g.:
I believe that it is appropriate that we go back to an earlier tradition that has largely passed out of macroeconomics of thinking about fiscal policy as having a major role in economic stabilization…