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The best short response is from Paul Romer:
Paul Romer
:
The Trouble with Macroeconomics
<
https://
github.com/braddelong/public-fi les/blob/master/readings/article-
romer-macro.pdf
> <
https://web.archive.org/web/20160914200257/
https://paulromer.net/wp-content/uploads/2016/09/WP-Trouble.pdf
>:
‘
If you want a clean test of the claim that monetary policy does not
matter, the Volcker deflation is the episode to consider. Recall that
the Federal Reserve has direct control over the monetary base, which
is equal to currency plus bank reserves. The Fed can change the base
by buying or selling securities
….
‘
August 1979
…
Volcker took over as Chairman
….
In month 2,
Volcker took the unusual step of holding a press conference to
announce changes that the Fed would adopt in its operating
procedures.
…
Fed offi cials expected that the change would cause a
“prompt increase in the Fed Funds rate” and would “dampen
inflationary forces in the economy.”
…
‘
The Fed aimed for a nominal Fed Funds rate that was roughly 500
basis points higher than the prevailing inflation rate, departing from
this goal only during the fi rst recession.
High real interest rates
decreased output and increased unemployment.
The rate of inflation
fell, either because the combination of higher unemployment and a
bigger output gap caused it to fall or because the Fed’s actions
changed expectations.
‘
If the Fed can cause a 500 basis point change in interest rates, it is
truly absurd to wonder if monetary policy is important. Faced with
the data in fi gure 2, the only way to remain faithful to dogma that it
is not important is to argue that despite what people at the Fed
thought, it was actually an imaginary shock that increased real fed
funds rate
…
<
https://www.icloud.com/keynote/0n4PwgGO6FAEEAqRG6I72oXtg#fama-volcker-disinflation-denialism
> 2020-10-12
Someone who wishes me ill reminds me today that Eugene Fama
regularly flunks the Turing Test.
Perhaps I should, rather, say that he is a blank slate, or a Bourbon:
Prince Charles de Talleyrand-Perigord said, famously, that the
Bourbons of France had “learnt nothing and forgotten nothing”—
learnt nothing about the world, and forgotten nothing of the privilege
and deferences to which they believed they were entitled, in spite of
the fact that they too had lived through the years of the French
Revolution and the Napoleonic Empire.
40 years after the Volcker disinflation, and Gene Frame is still
claiming that the ability of central banks to shake and transform
intertemporal price structures and so massively affect the economy is
a trick. Perhaps done, somehow, with mirrors?
There is something for someone to write about how obliviousness
and a total refusal to mark your beliefs to market is a road to career
success, and intellectual influence. A very strange road. But a road,
nonetheless
Gene Fama
:
Inflation is Out of the Control of Central Banks
<
https://themarket.ch/english/inflation-is-totally-out-of-the-control-
of-central-banks-ld.2476
>: ‘Frankly.... This is just posturing.
Actually, the central banks don’t do anything real. They are issuing
one form of debt to buy another form of debt. If you are an old
Modigliani–Miller person the way I am, you think that’s a neutral
activity: You’re issuing short-term debt to buy long-term debt or
vice-versa. That’s not something that should have any real effects....
‘
When we look at it systematically, we don’t see a big effect of Fed
actions on real activity or on stock prices or on anything else. That’s
why I use to say that the business of central banks is like
pornography: In essence, it’s just entertainment and it doesn’t have
any real effects…
Volcker Disinflation Denialism from Gene Fama…—Noted
