Three very good monetary posts
Matt Yglesias on Kocherlakota’s strange logic
Paul Krugman does a very good post that is slightly different, but analogous, to something I wrote yesterday and will post shortly.
Nick Rowe does a very good post on rules vs. discretion. He zeros in on a key quotation from a recent Bullard interview:
[Update: This interview (H/T Mark Thoma) with James Bullard, President of the St Louis Fed, is an example of what I mean. I used to think that the Fed had an implicit inflation target of around 2%-2.5%. Now I learn that one man who votes on Fed decisions has a lower bound of somewhere just below 1% on his personal inflation target.
‘He also suggested a renewed vigilance on a threshold that, if crossed, would cause the Fed to act. Referring to the annualized gains in core consumer prices of around 1%, Bullard said, “That’s not extremely low. But if it would start to go down from there, to 50 basis points or down to zero, then I would start to get concerned we’d be in a Japanese style scenario, so I think we want to defend our inflation target on the low side, and take aggressive action if necessary.”‘
Though the analogy is imperfect (and the fact that it is imperfect says a lot), we do not interview deputy governors of the Bank of Canada to find out their personal inflation targets. They would all give exactly the same 2% answer, and think you were silly for asking. Which is not to say that some of them don’t think the target should be changed; but until it is changed, and the new target is announced, it’s 2% for all of them. Period. Rule of law vs rule of men.]
Exactly. And I can’t resist quoting the first two lines from my review of Bernanke’s Jackson Hole speech, which raised a few eyebrows in the blogosphere:
Pretty disappointing, but with one silver lining. We pretty much know where the “Bernanke put” is, he drew a line at roughly 1% core inflation.
It’s unlikely we”ll get deflation, but 1% inflation won’t produce a robust recovery.
Tags: Deflation
11. September 2010 at 12:02
Matt Yglesias’ article drew attention to why I am rapidly losing respect for David Brooks. Anyone quoting Kocherlakota these days is blissfully unaware that they are quoting an economist who thought they were being sophisticated when they were actually failing Econ 101 when they say things like:
“To sum up, over the long run, a low fed funds rate must lead to consistent””but low””levels of deflation.”
This is what happens when Math people skip Econ 101 and go straight for the throat of DSGE. (Fortunately I, who had a background in Math before I took up Econ, bothered to earn a second BA in Econ first before subjecting myself to graduate study in the subject.)
In the final analysis, Kocherlakota’s estimates of the current unemployment situation are faulty. They fail to take into consideration that in the postwar period the Beveridge Curve always shifts out in the early stages of a recovery from a recession.
P.S. Check out this estimate of the Beveridge Curve during the Great Depression. Evidently it actually shifted inward then:
http://delong.typepad.com/sdj/2010/09/the-beveridge-curve-and-structural-unemployment-in-the-great-depression-not.html
Robin: “Holy Supply Side Economics Batman! You mean Cole and Ohanian were actually wrong in claiming that New Deal policies led to increased structural unemployment during the Great Depression?”
Batman: I’m afraid so Robin. When will those poor devils ever learn? You can never triumph over the power of empiricism.
11. September 2010 at 12:47
Scott
I contrasted Bullards interview with the previous day´s MP Symposium on the WSJ (http://online.wsj.com/article/SB10001424052748704358904575477580959771188.html?mod=WSJ_Opinion_LEADTop#U301241221633WCH&mg=com-wsj) where most (except Reinhart) proposed “passivity” by the Fed. Bullard argued for “active passivity” (we are ready for war but believe it will not happen) and that reminded me of Neville Chamberlain returning home after signing the Munich Accord in 1938 and saying “I belive it is peace in our time”!!!
Krugman´s post is OK but, as usual que “misrepresents” what he said earlier. In his May 1998 piece on Japan linked to in the post he thinks MP is much more effective than FP. He writes: “Structural reforms that raise the long-run growth rate (or relax non-price credit constraints) might alleviate the problem; so might deficit-financed government spending. But the simplest way out of the slump is to give the economy the inflationary expectations it needs. This means that the central bank must make a credible commitment to engage in what would in other contexts be regarded as irresponsible monetary policy – that is, convince the private sector that it will not reverse its current monetary expansion when prices begin to rise!”
11. September 2010 at 12:54
Kocherlakota´s “riddle” is easy to understand. He says “keeping the FF rate low will cause deflation (so we must raise it)”. But that would make the unemployment situation worse surely? No says Kocherlakota: “The u problem is stuctural so will not be affected by MP”.
11. September 2010 at 14:06
marcus nunes,
The only riddle is why Kocherlakota was put in such a position in the first place. We (as in “we Americans”) need a better way of choosing Fed bank Presidents. This is the most important position by far in this country, more important than representative, senator or president.
11. September 2010 at 14:26
Mark S.
He reflects a “view”. The important position is that of the Chairman. He has the control. Greenspan knew how to use it. Bernanke doesn´t!
11. September 2010 at 14:37
marcus nunes,
Yes, sometimes I too miss the Great Dictator.
12. September 2010 at 05:50
Mark, The Great Depression was caused by a huge drop in AD, not supply-side problems, as C&O claim. However high wage policies did raise the unemployment rate, and slow the recovery, especially after 1933.
marcus, I was actually being generous to Krugman, as i also disagree with some points. But it sort of reminded me of the post I had just written (up next). The way people misdiagnose problems, instead of seeing the obvious–AD is too low.
I could have pointed out that Krugman has drawn upward sloping AD curves, note he mocks others who come up with crazy ideas like upward sloping demand curves.
Mark and marcus, I sometimes wonder what would happen if Greenspan was still chair. But in fairness to Bernanke, Greenspan’s recent comments on the economic situation don’t inspire confidence. I don’t sense he understands that the problem is too little AD. On the other hand, I suppose he refrains from talking about monetary policy.