Brad Delong on conservative economists and the Fed’s payment of interest on excess reserves:
And Larry White chimed in: “the Fed has sterilized those injections” that had taken “the monetary base and see[n] it double and triple…” by paying interest on reserves.
On the videotape, Josh Bivens looks visibly flummoxed. I can see him thinking: “All of these guys are relatively orthodox quantity theory guys–they all expect a tripling of the monetary base to cause 200% inflation. And here they are, all saying that what you need to halt that 200% inflation is for the Fed to offer to pay 0.25%/year on reserves. Paying the banks $5 billion a year on their $2 trillion of reserves is enough to stop a 200% inflation in its tracks, and do so indefinitely. Do they really believe this?”
Apparently they do…
If Brad Delong is correct in his cynicism, we should not see a noticeable change in inflation from an increase in the base of nearly 400% in the last 6 years if the rate paid was 0%. If he is right, the program is pointless and the Fed's payment of interest on excess reserves only complicates things.
Note from my last post that Greenspan successfully handled crises by standard injections of liquidity and these proved successful. Bernanke steered away from this policy and suddenly long-run inflation is no longer a function of the money stock?