Read on Twitter
At the moment we are rightly focused on stimulus/relief fiscal packages. But going forward, imo, progressive economists should be pushing conversation about fundamental principles of monetary policy. (thread) https://twitter.com/Frank_vanlerven/status/1316457405539143680
In coming years, I think there will be a permanent shift away from idea that changes in a single policy rate can be the sole or central tool of monetary policy (let alone of policy in general), for several reasons.
First, one lesson of past dozen years is that changes in the policy rate are much less powerful & reliable tools for influencing output, employment etc. than people used to think. (Honestly should have been clear already, but definitely clear now.) Broader problem than just ZLB.
Part of the problem is weak link between policy rate and markets rates. And when changes to policy rate do get passed thru, effect on asset values and servicing costs of existing debt can be much larger than effects on new borrowing, making effects nonlinear & unpredictable.
Loosening may have little effect until it tips into an asset bubble, then big ones. Tightening may have little effect until it tips into widespread defaults, then big ones.
Second, as we now know (and should have already) conventional monetary policy is never neutral. Some market rates more closely linked to policy rates than others. Some activities more dependent on external finance than others. Some borrowers more interest-sensitive than others.
If goal of monetary policy is to change credit conditions so as to shift level of activity with minimum effect on composition, would require much more active management of credit flows to offset these differences.
But is neutrality in that sense goal? Third factor is that faith in financial markets as directors of productive activity is less confident & universal than it used to be. Crises are sign of failures that need to be corrected not just then but in normal times as well.
Finally, financing may be important constraint on investment in decarbonization and other social goals. To the extent we want to direct credit toward some activities and away from others, no way to draw sharp line between that and "normal" monetary policy.
All these considerations should lead us to revisit broad range of credit-policy tools that existed historically, before field of vision got narrowed to single policy rate.
In part, credit policy just means central banks continuing to do things they're doing now, but with goal of supporting real activity rather than stabilizing financial system. This new paper by @DanielaGabor is good on this distinction. https://transformative-responses.org/wp-content/uploads/2021/01/TR_Report_Gabor_FINAL.pdf
Two broad goals should be 1) when/if inflationary pressures do become a problem (I don't know rule this out), we have better tools to deal with them than blunderbuss of big hikes in policy rate. Yair Listokin's work could be one interesting place to look. https://www.hup.harvard.edu/catalog.php?isbn=9780674976054
Second to ensure that, given that any new monetary policy tools will involve supporting/restraining particular kinds of credit, there is democratic discussion of how finance is directed. With decarbonization at center of this.
Gerald Epstein's work igives good overview of broad range of tools central banks have used historically.
https://scholarworks.umass.edu/peri_workingpapers/103/
https://unctad.org/system/files/official-document/gdsmdpg2420091_en.pdf https://www.peri.umass.edu/publication/item/1207-the-political-economy-of-central-banking
https://scholarworks.umass.edu/peri_workingpapers/103/
https://unctad.org/system/files/official-document/gdsmdpg2420091_en.pdf https://www.peri.umass.edu/publication/item/1207-the-political-economy-of-central-banking
And of course there is my @rooseveltinst report with @rortybomb from a few years ago, which, looking back at Great Recession, suggested a number of new directions for future of monetary policy. https://rooseveltinstitute.org/publications/federal-reserve-expanding-monetary-policy-toolkit/
