Scott has been posting some interesting stuff on this topic (one, two, three). Many of you–and Scott himself, at the tail end of this post–are bracing for me to go nuts, accusing him of all kinds of inconsistency. But nope, I am far more judicious than you realize.
However, I do think there is something not quite right in how Scott is discussing these matters, particularly when it comes to the Fed’s new policy (since 2008) of paying “interest on reserves” (IOR). Here’s the comment I just left:
I’m actually mostly on your side on this one (believe it or not). But I do have one major doubt in the way you’re handling it.
How can you be sure that even a textbook rate hike (accompanied by reduction in reserves) is contractionary relative to the status quo? Wouldn’t it depend on the elasticity of velocity (or something like that)?
For example, if the Fed raises rates from (say) 4% to 5% and it does so by reducing the monetary base by (say) 2.3%, then to know the impact on NGDP, wouldn’t you need to pit the two forces against each other to see which dominates? Isn’t it conceivable that the point rate hike causes velocity to increase by more than 2.3%, and thus the smaller base is still generating more NGDP?
And then, it seems to me that it should be a no brainer that IOR is expansionary, since it doesn’t reduce the monetary base and increases interest rates. If you want to make an argument about fractional reserve banking and how a hike via IOR reduces M1 and the other broader aggregates, OK that at least makes sense, but I haven’t seen you make that argument.
Do you understand my confusion? I hope I’m at least making sense.