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RedMarble1 karma

Professor Sumner! I loved your book.

Given that most developed-world central banks are now paying (sometimes negative) interest on excess reserves, shouldn't market monetarists start talking about policy in terms of interest rates instead of quantity theory?

My thinking is:

  1. If the CB pays interest on excess reserves equal to the target rate then OMOs have no direct effect even away from the ZLB. (They may have an effect on expectations.)
  2. If the CB is committed to permanently maintain this IOR policy and committed to not buy other assets like stocks then OMOs should have no effect even through expectations about the future path of the base money supply (since OMOs will continue to be impotent through the end of time).
  3. But the CB should still be able to control nominal values (NGDP or price level) over the long term through the policy rate, even at ZLB, a la Krugman 1998.

I don't think we've seen much appetite for using purchases of risky assets to control the price level, but we have seen vast improvements in the forward guidance (on interest rates) central banks have been willing to provide.