"Does QE cause deflation?"

This morning Alphaville's Further Reading post linked to "Is QE lowering the rate of inflation?" at St. Louis Fed VP David Andolfatto's personal blog.
Mr. Andolfatto takes a look at the Williamson paper "Scarce Collateral, the Term Premium, and Quantitative Easing".
The first thing I thought of was Minneapolis Fed head Kocherlakota's Road to Damascus moment when he renounced the QE-causes-deflation-idea.
(as far as I can tell, it doesn't. it doesn't seem to work either but that's a different story)

Swooping in on the question is Not Quite Noahpinion with the headline post:

Oh my gosh. I am really excited. For years, I've been waiting for a chance to disagree with Brad DeLong about something econ-related, and the day has finally come!! It's enough to make me break my blogging hiatus a few days early.

Remember back in 2011 when Narayana Kocherlakota theorized that low interest rates cause deflation? Well, on Wednesday, Steve Williamson made a similar claim, writing that in a liquidity trap, QE will cause long-term deflation. Williamson based his post on this paper.

In a testy response, Nick Rowe called Williamson's post "horribly wrong," lamenting: "What the hell has gone wrong with some of the best and brightest in economics?" Brad DeLong then jumped in, accusing Williamson of mistaking an unstable equilibrium for a stable one. Paul Krugman echoed that accusation.

But David Andolfatto, in this excellent post, showed that DeLong and Krugman's criticisms are misplaced. In a typical New Keynesian model - the kind that now mostly dominates business-cycle theory, and the kind preferred by Rowe and Krugman - it's true that Williamson would be picking an unstable equilibrium. But Williamson is not using a New Keynesian model! Williamson's model is actually quite different. And as Andolfatto points out, there are macro models out there that are very similar to New Keynesian models, but have one small twist that makes the "QE-causes-deflation" equilibrium the stable one!

 So DeLong and Krugman have gone too far. They are arguing from their preferred model, and that's fine. But to say - as Brad does - that Williamson doesn't deserve a "union card as an economist" is wrong. And to say - as Krugman does - that Williamson has made a simple "misconception" by forgetting about stability is wrong. Williamson is simply using a different model than the standard model, and DeLong and Krugman have not yet examined that model carefully....MORE

One of the more sensible things from an economist this year.
Now a bit of humor. Here's Modeled Behavior from August 26, 2010:

Wonk City: More on Deflation and Interest Rates

My once and future dream is that the blogosphere would replace academic journals as the primary medium of intellectual exchange. We are far, far, far from that but this debate over deflation is getting sufficiently wonky that a boy can dream. If only there was some easy way to incorporate an equation editor into a blog writer, we would be off to the races.

Now to the subject at hand. Stephen Williamson rides in to defend Kocherlakota:

What [Krugman, Rowe, Thoma and Harless] are objecting to in Kocherlakota’s speech is one of the most innocuous things he said. Here’s the simplest example I know. Suppose a cash-in-advance model with a representative consumer, period utility u(c), discount factor b, constant aggregate endowment y. c is consumption....MORE

It appears to me damn near the same cast of characters.
I don't care who you are, that's funny right there.
I wish I had the time to observe economists in a clinical setting, it would be, to borrow a word: Fascinating.