Fiscal stimulus vs. quantitative easing

I've been puzzled by many things surrounding the rancorous macroeconomic debate.  One has been the relatively subdued debate on the optimal balance between fiscal stimulus and unconventional monetary policy (aka, quantitative easing).  Long ago I expected a modern revival of Keynes vs. Friedman monetarist debate.  There was some discussion but it has seemed subdued relative to what I would have expected.  My impression was that this didn't happen because it seems most conservatives don't like either fiscal policy or aggressive monetary policy (yet another puzzle).  I also thought that, maybe, the liberal-moderate wing of economists preferred fiscal stimulus because they thought the size of government was probably a little too small anyway.

But now I think the truth is we know little about quantitative easing and this makes economists of all stripes nervous.  And what little is known isn't especially encouraging.  In any case, I like the fact that Krugman has responded to those asking for more discussion on the subject:

Does unconventional monetary policy solve the zero bound problem?

Some comments on my post on the true cost of fiscal stimulus argue that the zero lower bound aka liquidity trap isn’t really binding, because the Fed is using other measures to expand the economy. A few commenters imply that I haven’t been paying attention.
Well, yes I’m aware that BB is doing a bunch of unconventional stuff. But the available — albeit thin — evidence is that it takes a huge expansion of the Fed’s balance sheet to accomplish as much as would be achieved by a quite modest cut in the Fed funds rate. And the Fed isn’t willing to expand its balance sheet to the $10 trillion or so it would take to be as expansionary as it “should” be given, say, a Taylor rule.
Which means that the zero bound is still binding, which means that right now we’re very much still in liquidity trap territory.
Jim Hamilton also seems to think there is a limit to what the Fed can do.  I really respect Jim Hamilton's views because he focuses squarely on the facts and it is impossible for me to tell whether he leans left or right politically--two things I like a lot in economists.


  1. "Long ago I expected a modern revival of Keynes vs. Friedman monetarist debate"

    Good points -- this debate might be occuring if it was 1975, but think of all the things that have changed since then: the rise of financial economics, RBC theory, EMH, Great Moderation, etc. Finance types in particular seem to worry a lot about inflation and have little use for fiscal and monetary policy. And in my one-year PhD macro sequence (2000-2001) I don't recall talking about monetary and fiscal policy very much, if at all.

    Jeff Reimer

  2. Your first mistake was getting advice from Paul Krugman. Why don't you stick to economists who actually know what they're talking about instead of ideologues like Krugman?

    Try Lee Ohanian or Harold L. Cole.

  3. Anonymous: I don't know how much you read Paul Krugman. But he's gotten just about everything right by reading textbook 101 economics. When I've questioned him, I've been wrong almost every time. And the ideology that sits strongly counter to him has gotten just about everything wrong.

    Track records count and are what separate the scholars from the ideological cranks. Given the lack of substantive content in your comment, I fear you're sitting on the wrong side of that fence. You might want to reconsider what you believe and why you believe it.


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