Olivier Blanchard on monetary offset
This tweet identified the real issue:
People often talk about the risk of economic overheating, but that seems unlikely. TIPS market participants seem to agree, as that market also forecasts close to 2% inflation going forward.
The actual risk is that a very large fiscal stimulus package will not stimulate the economy (at the margin), as the Fed will offset the effect. (Just as the Fed offset fiscal austerity in 2013). Instead, we will merely add to the national debt.
Given low interest rates, there’s a respectable economic argument for a slightly higher steady-state budget deficit, and some of the fiscal package may be useful. But quickly dumping $1.9 trillion into the the economy is almost certainly not a policy that minimizes the long run deadweight cost of taxes. I’d encourage policy makers to take a deep breath and think about their long run objectives. What are they actually trying to accomplish, and what’s the most cost effective way of getting there?
And think at the margin.
PS. I began blogging on monetary offset back in 2009. Expect to see a lot more discussion of this issue in the years ahead.