The Romer “conversion” and suggestion of a Volcker moment

With her Dear Ben piece on the NYT, Christy Romer has moved squarely into the Market Monetarist camp. Maybe she was there all along. After all, the abstract of her often mentioned 1992 paper on “What ended the Great Depression” reads:

This paper examines the role of aggregate demand stimulus in ending the Great Depression. A simple calculation indicates that nearly all of the observed recovery of the U.S. economy prior to 1942 was due to monetary expansion. Huge gold inflows in the mid- and late-1930s swelled the U.S. money stock and appear to have stimulated the economy by lowering real interest rates and encouraging investment spending and purchases of durable goods. The finding that monetary developments were crucial to the recovery implies that self-correction played little role in the growth of real output between 1933 and 1942.

But 18 years later, in April 2010, while still head of the CEA in a presentation at Princeton, Bernanke´s “home turf”, on “Back to a better normal” she writes (my bolds):

The recent recession was obviously not caused by tight monetary policy.  Interest rates were not especially high when it began, and so the Federal Reserve had only limited room to cut them.  It has brought short-term rates down to virtually zero, but it cannot push them below that.

The result is that we have not had the strong monetary stimulus that we would normally have in these economic  circumstances.  One study found  that given  the Federal Reserve’s usual responses to inflation and unemployment, economic conditions would lead it to cut its target for the federal  funds rate by an additional 5 percentage points if it were able to do so.

The combined  result of the policies that we have taken, the inherent resiliency of the American economy, and the headwinds that we face, is that we are growing again, but not booming.  GDP is rising at a solid pace, but not as quickly as after other severe recessions and not as quickly as it needs to.  As a result, the unemployment rate remains painfully high and is not predicted to reach normal levels for an extended period.

That is, despite the very low level of interest rates and all the attention to the growth of the Federal Reserve’s balance sheet, current monetary policy is in fact unusually tight given the condition of the economy.

She falls right into the trap of appealing to interest rate levels to define the stance of monetary policy. While “low” rates in the first paragraph indicate that MP was not tight, even lower rates in the last paragraph indicate MP is tight!

But forget interest rates. Romer 18 months ago believed MP was tight, but did she give Ben any suggestions then? No, because the second half of the presentation – What more can we do? – is mostly concerned with “targeted actions” being considered by the President and his economic team (her CEA and Summer´s NEC):

The President and his economic team see a key role for targeted actions.  There are fiscally responsible measures we can take that can make an important difference between so-so recovery and strong recovery; between stubbornly high unemployment that falls only very slowly and unemployment that is on a steady downward trend.

And 18 months later, despite all the “targeted actions”, employment is still depressed and unemployment uncharacteristically high.

But once “outside the loop” her mind opens and she begins to give good advice!

As a Fed Governor 7 years ago, Ben was all set for his “Volcker moment”. In a St Louis Fed conference in October 2004 on “Reflections on Monetary Policy 25 years after October 1979, in the discussion panel (page 282) he had this to say about Volcker:

the significance of Paul Volcker’s appointment was that he was one of the rare individuals tough enough and with sufficient foresight to do what had to be done.

So maybe we´re all set for NGDPT? Unfortunately no unless, much like Christy Romer in her NYT article, if instead of Fed Chairman, Bernanke was still just a Princeton professor like he was when he gave good advice to Japan.