Which is which?
Here are some very recent pronouncements from the Fed and the BOJ. See if you can figure out which is which:
“It is a critical challenge for XXX’s economy to overcome deflation and return to a sustainable growth path with price stability,” the XXX said in a statement after a regular two-day policy meeting.
. . .
The XXX said it “does not tolerate” a situation in which the country’s main price index remains flat or decreases on a yearly basis.
The public’s understanding of the XXX’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity.
. . .
The XXX has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations.
Hmmm. The first part of each quotation mentions stable prices. That sounds more like the BOJ, which favors zero inflation, rather than the Fed, which hints that it would like something closer to 2% inflation. On the other hand the second part of central bank A’s quotation implies they actually do want something more like slightly positive inflation, not stable prices. So maybe A is the Fed.
The second part of central bank B’s quotation mentions that people have been pressing them to set a higher inflation target. Of course we all know that many American economists (including Krugman and Bernanke) continually pressed the BOJ to adopt a higher inflation target as a way of getting out of its liquidity trap. So I am going to guess that central bank A is the Fed, and central bank B is the BOJ.
Oops. I just checked and it appears I got the two central banks mixed up. Well you can’t really blame me; these days it is becoming increasing difficult to distinguish between the Fed and the BOJ.
Tags: Bank of Japan
18. December 2009 at 08:51
Scott, I have a request. As you point out, the Fed and the BOJ seem to be falling for the same “trap”. Obviously, neither one is staffed by stupid people unaware of the research that prescribes a different policy.
So, my guess would be that there is some sort of structural problem, probably institutional incentives, that is pushing them down the wrong path. Could you speculate as to this root cause?
18. December 2009 at 09:07
New post of Krugman on the Fed:
http://krugman.blogs.nytimes.com/2009/12/18/the-curse-of-montagu-norman/
He strongly supports a more agressive monetary policy, but also implicitly discretionary monetary policy.
18. December 2009 at 10:08
Curiously, a little less than one year ago IT was up for debate:
http://blogs.wsj.com/economics/2009/01/08/inflation-targeting-makes-fed-comeback/
18. December 2009 at 10:44
I guessed right: the Fed would never say it had to overcome deflation and “return” to price stability. That would imply admitting that its policy was too tight to begin with. So A had to be Japan.
Additional support came from the expectations language in B. I’m more accustomed to hearing about exp. from the Fed than BoJ, who tend to sound like they are more in control of actual price changes than in charge of expectations of price changes.
18. December 2009 at 10:57
[…] Japan bashing is popular. Looking at the data since QE started: […]
18. December 2009 at 11:15
Of course, if I had been up to date with your “prolificacy,” I would’ve recognized the second quote from just two posts ago. Oh, the problems of not reading my notes and skipping lectures before a test!
18. December 2009 at 13:30
Off topic, a data point:
“At the highest level ever recorded, 33% of businesses surveyed by the National Federation of Independent Businesses said their biggest problem is poor sales. Only 5% said that their biggest problem is financing and interest rates.”
18. December 2009 at 20:04
Sorry for the breakdown, this time it was a link from The Atlantic that did us in.
Kevin, That’s a good question. Big institutions are very conservative, slow to change. It tough to ask an institution that is used to doing interest rate targeting, to suddenly do something else. I will think about a post. Meanwhile I have a new post that considers some of the cognitive biases that I think hurt us in this crisis, and also in the Great Depression.
Jean, Thanks, weirdly similar to my new post, but I didn’t see it until after I posted.
marcus, Thanks for the article. The weird thing is that by 2009 the plan should have already been in effect, but they were talking about it as something they could do if things got really bad. But things were already really bad in January 2009!! Why was there no sense of urgency? And why has it still not been adopted? I fear that if they adopted it today it would probably be in such a watered down version that it would have little effect. The markets were even skeptical of FDR at first. And they really need level targeting, which also seems unlikely.
D. Watson. That’s good. Of course I really knew as I set up the problem, but I set it up in a way where I hoped to fool people.
Statsguy, Yes, that is very significant data. It supports our argument that people under-rate the role played by the big drop in AD, and overrate the importance of the financial crisis. Although the financial crisis was certainly important in an absolute sense, it played less of a role in the recession than falling AD.