When I started blogging I kept claiming that the steep recession of 2008-09 was caused by ultra-tight Fed policy. I had the distinct impression that almost no one agreed with me. Even some who favored NGDPLT preferred to call the mistakes “errors of omission,” not tight money causing a recession.
Then I found out that Bernanke agreed with me. No, he didn’t say the Fed caused the recession under his leadership, but he did agree that it is NGDP growth and inflation that matter, not interest rates or the money supply:
The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman . . . nominal interest rates are not good indicators of the stance of policy . . . The real short-term interest rate . . . is also imperfect . . . Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.
At least he felt that way in 2003, maybe not today. In any case, since mid-2008 the average growth in those two variables has been lower than at any time since Herbert Hoover was President.
Now there is an indication that Michael Woodford agrees with Bernanke. Not the Bernanke of 2013, who obviously can’t admit that monetary policy has been really tight since 2008, but rather the Bernanke of 2003. Unfortunately I cannot find a link, but highly reliable commenter “Integral” sent me this report about Woodford’s comments at the recent AEA meeting:
As for Woodford and Gertler, their comments were verbal. An audience member asked how they would gauge the stance of monetary policy, given that one shouldn’t use the money supply or level of the interest rate. Woodford replied with, loosely quoting, “one should look at outcome variables…inflation and nominal GDP.”
So I’m in a quandary. Commenter “K” claims there is nothing new in my claim that money has been tight. He says the New Keynesians agree with me. OK, maybe he is right. But then someone tell me why during the past 5 years I’ve read approximately zero articles written by New Keynesians talking about tight money causing a recession in 2008-09? And a zillion articles that monetary policy is highly accommodative.
I suppose one could argue that NKs don’t think the Fed can do anything about the tight money, as we are in a liquidity trap. But Bernanke doesn’t believe that. And I recall Brad DeLong asking Bernanke why the Fed didn’t just raise the inflation target to 3%. That would count as “doing something” in the NK model, wouldn’t it? So DeLong must not believe the Fed can “do nothing.”
BTW, consider the following:
1. In his writings on Japan, Bernanke often talked about the problems caused by a shortfall in NGDP.
2. He seemed to refer to the concept of NGDP more than most elite macroeconomists (at the time.)
3. People with views on monetary policy that are very close to those of Bernanke have recently converted to NGDPLT.
4. The Fed explicitly set a 2% inflation target, right before the NGDP bandwagon gained momentum.
5. The Fed obviously cannot switch targets right after explicitly adopting a 2% inflation target.
Suppose Bernanke were asked: “Off the record, would your job over the last 5 years have been easier with an inflation target or an NGDP target?” What do you think he would say?