The untapped power of monetary policy

This piece in the NYT made “waves”:

As the Fed’s policy-making board prepares to meet Tuesday and Wednesday — after which the Fed chairman, Ben S. Bernanke, will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise.

Krugman did a post:

What QE2 might have done — and probably did do for a while — is act as a signal of the Fed’s determination to do whatever is necessary, and maybe of a willingness to accept higher inflation. But this only goes so far, especially with all the political pressure on the Fed and its constant declarations, in the face of that pressure, that it remains as steadfast against inflation as ever.

And so did Steve Williamson, who thinks Philadelphia Fed president Plosser is the right reference:

Charles Plosser certainly comes off well. The guy has good sense, and integrity:

“I wasn’t a big fan of it in the first place,” said Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia and one of the 10 members of the Fed’s policy-making board. “I didn’t think it was going to have much of an impact, and it complicated the exit strategy. And what we’ve seen has not changed my mind.”

It´s been long known among so called “quasi monetarists” that QE2 was a week effort to get the economy going again. This is from David Beckworth a few days ago:

The problem with the QEs all along is that they have been rather ad-hoc and unpredictable.  This has made them less effective and politically polarizing.  Imagine how different the Fed’s monetary stimulus would have been had they adopted an explicit target, preferably a nominal GDP level target.  Such an approach would have given them the freedom to do really aggressive ‘catch-up’ monetary easing until nominal GDP returned to the targeted trend while at the same time ensuring long-term predictability.  It also would be viewed (correctly) as constraining the Fed’s power.

The pictures below give a stylized indication of what a “Nominal Spending Target” would do. In this set up inflation would be allowed to go above “target” temporarily (if that´s what it takes) to get spending back to trend, but the employment population ratio (paraphrasing S. Williamson) would “come out of the toilet”. It´s obviously not good enough just to resume trend growth (at a much lower trend growth path):

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One thought on “The untapped power of monetary policy

  1. Pingback: The untapped power of monetary policy | Historinhas | Articles about the world

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