From the comment section

Here’s a comment that TallDave left over at my recent Econlog post (which discusses the Fed transcripts released yesterday.)

Failure to fire the harpoon of forward guidance will someday be remembered as this generation’s real bills doctrine.

Policy wasn’t as suboptimal as TGD, but that’s damnation with faintest praise — how much should we have learned by now?

It’s interesting that in 2013 the US, Japan and Britain all adopted a form of forward guidance. Unfortunately the guidance was extremely weak; perhaps 10% of potential in the US and Britain, and 20% of potential in Japan.  Interestingly, even that was enough for all three economies to strongly outperform the predictions of standard Keynesian models in 2013.

When I think of what might have been had 100% full strength guidance been adopted in 2008, it almost makes me want to cry.


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9 Responses to “From the comment section”

  1. Gravatar of Joe Eagar Joe Eagar
    22. February 2014 at 23:59

    The Fed’s 2008 transcripts are out. The December transcripts has a good discussion on communication, and I think gives some insight into why the Fed didn’t act more strongly in late 2008.

  2. Gravatar of Joe Eagar Joe Eagar
    23. February 2014 at 00:03

    This is interesting. The FOMC apparently considered abandoning its interest rate target (see Alternative A in the December transcript’s appendix):

    http://federalreserve.gov/monetarypolicy/files/FOMC20081216material.pdf

    From the discussing in the transcripts, it sounded to me like the FOMC members were afraid the markets would conclude they had lost control of monetary policy and panic. I could be misreading the discussions though.

  3. Gravatar of Major_Freedom Major_Freedom
    23. February 2014 at 00:38

    “When I think of what might have been had 100% full strength guidance been adopted in 2008, it almost makes me want to cry.”

    An even bigger and more destructive unsustainable boom? You’re making everyone cry.

  4. Gravatar of JC JC
    23. February 2014 at 01:56

    They did have guidance in 2008, Scott. They were guiding the market to tighter policy by citing the inflation bogey.

  5. Gravatar of Major_Freedom Major_Freedom
    23. February 2014 at 02:54

    JC:

    Good point.

    Why did the market not adapt to the falling demand by adjusting prices? Why didn’t prices adjust?

  6. Gravatar of Daniel Daniel
    23. February 2014 at 04:12

    Why is Major_Freedom such an idiot ? Why doesn’t he accept reality ?

  7. Gravatar of Jon Jon
    23. February 2014 at 11:39

    We knew about forward guidance. This was woodford’s pet idea.

    What has been hobbling is the notion that interest rate announcements were conventional policy and other things were unconventional policy. Probably forward guidance captures more directly how it all works: by directing expectations of future policy.

    It’s fascinating to think about how the fed worked when its communication policy was to communicate nothing. People peered at how the fed behaved in the market to discern what to expect (will happen in the future).

  8. Gravatar of Negation of Ideology Negation of Ideology
    23. February 2014 at 11:52

    Major –

    “An even bigger and more destructive unsustainable boom? You’re making everyone cry.”

    and

    “Why did the market not adapt to the falling demand by adjusting prices? Why didn’t prices adjust?”

    Why can’t prices simply adjust to a boom? In other words, why is it that you believe prices can be perfectly flexible downward but not upward? If deflation is no problem because people can instantly adjust, then why are you so worried about inflation? If your view is correct, then in Zimbabwe, everybody could have simply started quoting prices in trillions instead of ones and be fine. In fact, if you’re correct, then monetary policy is completely unimportant and you’re wasting your time commenting here.

    I can see how someone could be equally opposed to inflation and deflation, but the idea that deflation is harmless but inflation is horrible is absurd to me.

  9. Gravatar of ssumner ssumner
    23. February 2014 at 13:29

    Joe, Interesting, I wonder if there is discussion of that option.

    JC, I suppose that’s a form of guidance, but not what Woodford had in mind!

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