Hoisted from Comments: What Is "Monetary Policy"?

Joe Gagnon writes:

What Is This "Demand for Money" of Which You Speak?: Joe Gagnon said...

Hi Brad,

Good column. I agree with the substance of your analysis. But to continue a terminological debate we had about 6 months ago, I would like to propose defining monetary policy as printing money to buy assets and fiscal policy as selling assets to buy goods or make transfers. Thus, helicopter drops are just monetary + fiscal policy.

Away from the zero bound, monetary policy can stick to buying safe short-term assets because money yields zero and all other assets have a positive yield. At the zero bound, as you note, for monetary policy to have any effect it must buy other types of assets that do not have zero yield. But in both regimes the way monetary policy works is by pushing down the rates of return on financial assets. That is quite distinct from fiscal policy which works by increasing demand directly, albeit at the expense of higher rates of return on financial assets. And of course, helicopter drops increase demand directly without increasing rates of return on financial assets.