13
Aug
2015
Beckworth + Murphy = Total Consciousness
David Beckworth wrote a response to me (and David R. Henderson) on the Canadian budget turnaround in the 1990s. In this Mises CA post I summarize the debate and then reconcile Beckworth’s position and mine.
The apparent contradiction was that (a) I had shown stagnant growth in the Bank of Canada’s assets in the period when the budget cuts kicked in, but (b) Beckworth showed an apparent one-shot surge in the B of C’s monetary base in 1994. What’s the deal?
It turns out that the Bank of Canada phased out reserve requirements from 1992 – 1994, and that’s what’s going on. I have a chart that makes this crystal clear. I also comment on how this reconciliation affects the broader debate.
It’s a more than a little misleading to call what more or less amounts to Hawtrey’s “Treasury View” “The Keynesian Position.” It’s definitely not an Old Keynesian position. And if it’s a New Keynesian position, well, the New Keynesians are really more like Old Monetarists.
It would be more accurate to say that in this case, Krugman took the Monetarist position, and Beckworth weighed in, taking…the Monetarist position.
This has been HISTORY OF THOUGHT PEDANTRY.
Anyway I’m glad there’s been uh, some convergence at least. Like I said before, Beckworth ranks high on my estimates of “Quality of Market Monetarists” as commentators.
Bob,
It looks like you now agree that “monetary base (excluding required reserves).” is the correct chart to use for this sort of analysis , and that using this measure there was in fact monetary easing due to the change in reserve requirement rules.
I see your point that the spike in the base occurred too early to correlate closely with what would have been required to offset the reduction in budget deficit. But on the other hand, if your theory is correct (that is: a reduction in the deficit does not have a negative effect on NGDP, while an increase in monetary base is inflationary) should we not have seen a spike in inflation/NGDP for the period in question ?
Transformer wrote:
t looks like you now agree that “monetary base (excluding required reserves).” is the correct chart to use for this sort of analysis
I didn’t exactly say that Transformer. I would want to explore it more. E.g. did commercial bank lending increase dramatically in this period? I agree that cutting reserve requirements is loosening, but I don’t know if it’s the same thing as injecting the same amount in new reserves.
thanks for the clarification
On cutting reserve requirements.
If banks hold 10% reserves as a optimal banking practice and then the CB cuts reserve requirements from 7.5% to 5% then the change would make no difference – so in that case ‘monetary base (excluding required reserves)’ would rise (since there is now less required reserves to exclude) but the effects on monetary policy would be zero.
” if your theory is correct (that is: a reduction in the deficit does not have a negative effect on NGDP”
I don’t think this is Bob’s theory. Or if it is, then Market Monetarists and Bob are arguing about nothing.
If I understand Bob correctly, he believes that even if decreasing deficits resulted in decreased NGDP, that wouldn’t be a bad thing. And possibly that real GDP, or at least the real version of that component which actually reflects consumer preferences (RGDP-RG?) wouldn’t even have to fall.
And I think there’s definitely at least one case where we know that was true: NGDP fell after WWII but the fall was essentially entirely restricted to government spending, and government spending on the military in particular. Since the Fed failed to perfectly “offset” that fall, you’d think we’d have had a bad recession. Well, there was nominally a recession, but the private economy boomed.