Simon Wren Lewis pitches in to an exchange involving Adair Turner, myself and most recently Paul Krugman.
Adair wrote to make the argument that helicopter money was an alternative to lowering interest rates. My blog pointed out that it wasn’t. Absent the Fisher effect of helicopter money kicking in instantaneously, lower interest rates would be experienced in the interim, because of the liquidity effect of the extra money, just as in the case of the lower policy rate alternative [which would be implemented by…. creating extra money!].
Simon’s contribution says, in so far as it bears on my post, in short: if we are already at the limit below which the policy rate cannot be lowered, then interest rates can’t fall. Of course that is true. But the thought experiment that started the conversation clearly presupposes that interest rates are not already at this level. Otherwise it would not make sense to claim in the first place, as Adair did, that HM was an alternative to lower rates.
Simon also writes:
“anything that raises demand (as a fiscal expansion will) will tend to raise inflation, and so the monetary authorities will tend to raise nominal interest rates. Any temptation to say ‘yes but in the short run’ becomes dubious because of expectations effects.”
A few points here.
First, with sticky prices – and especially with other forms of persistence in the economy on the demand side – the change in inflation will be gradual. Just as with a conventional fiscal expansion.
Second, it’s perplexing to me for Simon to note ‘the authorities will tend to raise nominal interest rates’. HM involves moving to a conscious plan for the trajectory of money quantities. In order not to undo HM either wholly or partially, interest rates are left to clear the market. The debate here is whether that market clearing rate will, for a while, and for the duration of the preference by policymakers for money quantities, be temporarily lower than in a counterfactual world in which the authorities instead forgo HM and opt simply to lower interest rates from their starting value.
Third, the importance of expectations is no doubt crucial. We can say that under rational expectations the Fisher effect might work faster than under adaptive expectations or learning. We don’t know for sure how expectations would work in this novel policy experiment of HM. But it doesn’t follow from this uncertainty that one should simply conclude that the Fisher effect of higher rates dominates in the short run too.