Now I get Bernanke

He´s an inflation targeter through and through! And an inflation targeter wants, at all costs, to avoid deflation! That´s all folks! He has no understanding of the benefits from
stabilizing nominal spending growth along a target path. He only thinks in terms of inflation/deflation.

I (and others) have interpreted his famous paper from 1999 – Japanese Monetary Policy:
A case of self-induced paralysis
– as a spirited defense of level targeting.
But no. From this very good Tim Duy post on FOMC Reaction the real Bernanke shows up clearly:

Bernanke made clear in his response to a Japanese reporter that he sees himself as exactly the Bernanke of a decade ago. His comments then meant that:

“…a determined central bank can always do something about deflation.”

In that same post we read:

So what happened to the Bernanke of a decade ago, when he chastised the Bank of Japan for inaction? Brad DeLong laments:

Those of us Democrats who were happy when Barack Obama reappointed Ben Bernanke as Fed Chair thought that we were getting the Ben Bernanke we knew–the student of the Great Depression and of Japan’s Lost Decade dedicated to doing whatever was necessary to stabilize the time path of nominal GDP, up to and including dropping bales of money out of helicopters.

Whatever happened to him?

Nothing happened to him. It was all in our imagination! We were all naïve because if Bernanke thought for a minute that macro stability was tied to nominal spending evolving
along a stable growth path he would never have allowed nominal spending to record the biggest drop since 1938! (see graph below once again):

Update: This Business Week article “wraps it up ironically”:

“If [Bernanke] says the little blip in inflation is temporary and it’s going to go back below target, and he says he’s very unhappy with the unemployment rate, then why isn’t he doing more?” Gagnon asks. “It’s really ironic. It’s a self-induced paralysis.”

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8 thoughts on “Now I get Bernanke

  1. Let me paraphrase Nick Rowe:

    Oh Christ. Oh Christ. Oh Christ.

    I never did understand how the Fed makes decisions. But if the President of the NY Fed, and people like him, have any sort of power over monetary policy, we are so totally screwed.

    Seriously? The Fed predicts egregiously high unemployment until 2013 and they do nothing?

  2. Pingback: Assorted Monetary Musings-Economic News | Coffee At Joe's

  3. Bernanke is a lousy inflation targeter. Market-based expectations of inflation have fallen to 1.9% (2-yrs swaps, up from 1.7% a few days ago), compared with ~2.2% before the latest FOMC statement. I suppose it’s still better than targeting sub-0% inflation as the BOJ are doing.

    BTW, inflation expectations plummeted in Q4 2008 and Fed officials were twiddling there thumbs and talking about “exit strategy”. Expectations did not improve until QE2 was announced in Aug 2010.

  4. anon: He may be a lousy inflation targeter but that doesn´t mean he isn´t one. Anyway, there has always existed the group that thinks the correct level of inflation is “zero” (i.e absolute price level stability). And note that in the US there was never a stated target for inflation, although we frequently hear about a “confort zone” of 1.5-2% rate. From the last few years (and from his 2002 speech on deflation) I am certain that he is an anti-deflation guy and worries mostly abou keeping inflation a “tad above zero”.

  5. Pingback: Assorted Monetary Musings : Invest My Money

  6. Pingback: TheMoneyIllusion » If the Fed is inflation targeting, it’s good news for supply-side reforms and bad news for fiscal stimulus.

  7. Pingback: If the Fed is inflation targeting, it’s good news for supply-side reforms and bad news for fiscal stimulus.-Economic News | Coffee At Joe's

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