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Noah Smith

Monetarists Are Out of Ideas

Existing policies don't boost growth, but no one seems willing to try something different.


Source: schellhorn/ullstein bild/getty image

Steve Williamson of the Federal Reserve Bank of St. Louis for the past three years or so has been trying to convince the macroeconomics world to consider a bold new theory -- that central bank policy works in reverse, and that low interest rates cause low inflation. This is an idea sometime referred to as Neo-Fisherism. Recently, Williamson has challenged my Bloomberg View colleague Narayana Kocherlakota, formerly of the Federal Reserve Bank of Minneapolis, in an extended blog and Twitter debate on the subject. The result has been the deepest, most illuminating exchange about monetary policy ever posted on the internet.

Other than Kocherlakota, very few people have even engaged with the Neo-Fisherian idea. Certainly it doesn’t seem to have made much of a splash in the academic macro community, and even less in central bank circles, despite its dramatic and startling implications for policy. A few respected economists, such as John Cochrane, Stephanie Schmitt-Grohe, and Martin Uribe, have argued in favor of the idea, or something like it. And the highly respected Xavier Gabaix of Harvard has incorporated the idea into a new model . But the overall response has been muted in the halls of policy making and academia.