Bernanke made a presentation today at the 56th Economic Conference hosted by the Boston Fed with the title: “The Effects of the Great Recession on Central Bank Doctrine and Practice”. The “causation” implied in the title could well be reversed: The Effects of Central Bank Doctrine on Bringing about the Great Recession”.

I found this passage in the speech revealing of the misconceptions that plague “inflation targeters”:

To what extent, if at all, has the pre-crisis consensus framework for monetary policy been changed by recent events? In part because they recognized the benefits of continuity and familiarity during a period of upheaval, central banks generally retained their established approaches to monetary policy during the crisis; and, in many respects, the existing frameworks proved effective. Notably, well-anchored longer-term inflation expectations moderated both inflation and deflation risks, as price-setters and market participants remained confident in the ability of central banks to keep inflation near target in the medium term. The medium-term focus of flexible inflation targeting also offered central banks latitude to cushion(!) the effects of the financial shocks on output and employment in the face of transitory swings in inflation. In particular, they were able to avoid significant policy tightening in mid-2008 and early 2011, when sharp increases in commodity prices temporarily drove headline inflation rates above target levels. Finally, for central banks with policy rates near the zero lower bound, influencing the public’s expectations about future policy actions became a critical tool…

How come he believes that the medium term focus of flexible inflation targeting helped avoid significant policy tightening…He´s well aware (or should be) that the level of interest rates is a very bad indicator of the stance of monetary policy. And how can he say, in good faith or with a straight face, that policy was NOT significantly tightened in mid 2008? What, then, was responsible for the fantastic drop in aggregate demand that took place at the time? The “hand of God”? A bad “throw of the dice”?

Immediately following is the statement:

The commitment to a policy framework that is transparent about objectives and forecasts was helpful, in many instances, in managing those expectations and thus in making monetary policy both more predictable and more effective during the past few years than it might otherwise have been.

The only instance that´s true is if you are exclusively concerned with keeping inflation bracketed inside a narrow band, no matter the depth of the “hole” “established approaches to monetary policy” has thrown the economy into!

And about “influencing the public´s expectations about future policy actions” the Fed could do much better by heeding to the advice given by the widening circle (here and here) of those that advocate it adopt an NGDP level target!


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