Via Mark Thoma I came across a post by Antonio Fatas who complains:

I find it surprising that those who argued that QE had very little effect in the economy are now ready to blame the central bank for all the damage they will do to the economy when they undo those measures. So they seem to have a model of the effectiveness of central banks that is very asymmetric - I would like to see that model.

One possible model that contains such an asymmetric response is the model of addiction. Let me provide an analogy that I have explored in detail in an earlier post - the history of psychotropic medication in the United States and its usage to combat an ever-increasing laundry list of mental “disorders”. You keep taking the pills and you hang on, you barely function albeit in a somewhat dysfunctional manner. If you increase the dosage the benefits are negligible. But if you stop taking the pills and do nothing else to break the fall then you risk a catastrophic collapse. That is the asymmetric response of addiction.

Unlike the critics that Fatas refers to, I’m not opposed to the withdrawal of monetary stimulus but the stimulus itself. In particular I am opposed to the nature of the stimulus which focuses all its efforts on propping up asset prices. However, unlike most Fed critics who tend to be conventional “austerians”, I’m a strong critic of asset-price based monetary policy and an equally strong advocate for combined monetary-fiscal stimulus in the form of direct cash transfers to households. I support helicopter drops not just because it is fairer and more “neutral” in its impact on income distribution than quantitative easing. I support helicopter drops because it is the parachute that prevents the hard landing if we stop quantitative easing. I support helicopter drops because it is the most free-market of all macro-stabilisation policies. Rather than bailing out banks and firms and propping up asset prices, helicopter drops simply mitigate the consequences of macroeconomic volatility upon the people. I support helicopter drops because it helps us build a resilient economic system as opposed to chasing the utopian aim of perfect macroeconomic stability.



The idea that QE props up asset prices without doing much good for the economy at large is perfectly consistent with recent events. No asymmetry needed there. Only if you believe that the recent price drops are indicative of a drop in real economic activity do QE opponents have to talk about assymetric responses but so far there is no data to support that.

The Reality of Abenomics: Qualitative Easing and Propping Up The Markets at macroresilience

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