In Honor of Marvin Goodfriend
Two monetary policy experts died this past week. I can depend on others to properly honor Paul Volcker (September 5, 1927 – December 8, 2019), who used dramatically high interest rates to bring down inflation in the 70s. But Marvin Goodfriend (November 6, 1950 – December 5, 2019) is in danger of being underappreciated. Despite being in many ways a monetary policy hawk, Marvin helped lay out the path to dramatically low interest rates to avoid a repeat of the Great Recession or worse. (Worse might go by the name of “The Great Deflation” or “Secular Stagnation.”)
In a November 2000 Journal of Money, Credit and Banking article, Marvin suggested a modern way to impose a carry tax on paper currency. (See “Marvin Goodfriend on Electronic Money.”) Even more significantly, in a 2016 Jackson Hole paper, Marvin pointed out how a floating exchange rate between paper dollars and dollars in the bank could totally remove any lower bound on interest rates. He framed this in the context of all the interest rate taboos that have been left behind in the past. I was there that year at Jackson Hole. In the comment period, I contrasted this to my preferred approach of a tightly controlled crawling-peg exchange rate between paper dollars and dollars in the bank. (See “Some Selections Related to Negative Interest Rate Policy from the General Discussions at the 2016 Jackson Hole Symposium on ‘Designing Resilient Monetary Policy Frameworks for the Future.’”) Marvin simply said:
On Miles Kimball’s point, you know Miles and I are allies on this, and I’d like to talk to him about the crawling peg and the feasibility. Maybe I’m wrong, I don’t know. But basically we’re in the same camp as this is something that should happen and can happen.
I am proud to be called an ally of Marvin Goodfriend on this.
I arranged a call with Marvin a couple of weeks later to talk about the difference between our two approaches. He said that he thought deep negative rates would be resisted so long that by the time a central bank was ready, it would have already destroyed most of its credibility. If so, then a crawling peg exchange rate between paper currency and money in the bank might not be fully credible, but a floating rate between paper currency and money in the bank could be. I still don’t think Marvin is right about the best course of action, and I think he overestimates the difficulty of credibility for a crawling peg exchange rate, but his perspective is a very interesting one. Most importantly, his plan, like mine, would work. A floating exchange rate between paper currency and money in the bank would remove any lower bound on nominal interest rates and allow a robust monetary policy response to any decline in aggregate demand.
In the future, I predict that negative rates—even deep negative rates—will be seen as a normal and essential part of monetary policy. In that future, Marvin will be seen as an important part of the history of negative interest rate policy.
Other posts on Marvin Goodfriend and Paul Volcker:
For other posts on negative interest rate policy, see “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide.”