A new paper by Laurence Ball – Bernanke and the Zero Bound – tries to make sense of Bernanke´s actions:
What forces shape the policy decisions of a central bank? To gain insight into this question, this paper examines the policies of the Federal Reserve from December 2008 to the present.
Unemployment has been high during this period and Fed officials have expressed a desire to reduce it by stimulating aggregate demand. Yet their traditional tool for demand stimulus–cuts in the federal funds rate–has not been available, because this rate is close to its lower bound of zero. In this setting, the Fed has confronted choices among various “unconventional” monetary policies.
The analysis starts with a puzzle about Ben Bernanke. From 2000 to 2003, when Bernanke was an economics professor and then a Fed Governor (but not yet Chair), he wrote and spoke extensively about monetary policy at the zero bound. He suggested policies for Japan, where interest rates were near zero at the time, and he discussed what the Fed should do if U.S. interest rates fell near zero and further stimulus were needed. In these early writings, Bernanke advocated a number of aggressive policies, including targets for long-term interest rates, depreciation of the currency, an inflation target of 3-4%, and a money-financed fiscal expansion. Yet, since the U.S. hit the zero bound in December 2008, the Bernanke Fed has eschewed the policies that Bernanke once supported and taken more cautious actions–primarily, announcements about future federal funds rates and purchases of long-term Treasury securities (without targets for long-term interest rates).
A number of economists have noted the difference between recent Fed policies and Bernanke’s earlier views– usually critically. In discussing one of Bernanke’s early writings on the zero bound, Christina Romer says “My reaction to it was, ‘I wish Ben would read this again’” (quoted in Klein ).
Paul Krugman (2011b) asks “why Ben Bernanke 2011 isn’t taking the advice of Ben
Bernanke 2000.” In criticizing Fed policy, Joseph Gagnon echoes Bernanke’s criticism of the Bank of Japan: “It’s really ironic. It’s a self-induced paralysis” (quoted in Miller, 2011).
Sections IV-VI review the broader evolution of Bernanke’s views. I find that they changed abruptly in June 2003, while Bernanke was a Fed Governor. On June 24, the FOMC heard a briefing on policy at the zero bound prepared by the Board’s Division of Monetary Affairs and presented by its director, Vincent Reinhart. The policy options that Reinhart emphasized are close to those that the Fed has actually implemented since 2008; Reinhart either ignored or briefly dismissed the more aggressive policies that Bernanke had previously advocated.
In the discussion that followed the briefing, Bernanke joined other FOMC members in agreeing with most of Reinhart’s analysis.
Shortly after the meeting, Bernanke began writing papers that took positions very close to Reinhart’s–some with Reinhart as a coauthor. Clearly, the analysis of the Fed staff in 2003 was critical in changing Bernanke’s views about the zero bound.
At first glance, Bernanke’s sharp change in views is surprising. In 2003, he was a renowned macroeconomist who had studied the zero-bound problem extensively and expressed strong views about it. Yet he quickly accepted a different set of views when Reinhart presented them.
Why did the positions of the Fed staff influence Bernanke so strongly?
This question is difficult to answer, as we can’t observe Bernanke’s thought processes. Yet we can develop hypotheses based on research by social psychologists, who study group decisionmaking.
Based on this research, Section VII suggests two factors that may help explain Bernanke’s behavior. The first possible factor is “groupthink” at the FOMC, a tendency of Committee members to accept a perceived majority view rather than raise alternatives that might be unpopular.
The second is Ben Bernanke’s personality, which is typically described as “quiet,” “modest,” and “shy”– traits that might make him unlikely to question others’ views.
Bottom Line: Greenspan is sorely missed!
Update: Matt Yglesias has a take:
At the end of the day, I find this narrowly personality-based explanation a bit unsatisfying. A more economics-oriented explanation might appeal to incentives. Anything you try to do in an unfamiliar situation might fail. But the strategies emphasized by professor Bernanke are all premised by the idea that a central bank can on its own boost an economy even at the zero bound. A central banker who implements those ideas would run the risk of needing to take responsibility for failure in the event that something bad happens. Opting for the fudge that constituted conventional wisdom from the fall of 2008 through to the subsequent winter got Bernanke hailed as Person of the Year despite the economy collapsing all around him. All throughout the policy apparatus people have strong incentives to avoid saying that they have the power to fix problems and should be judged based on outcomes.
And that´s consistent with past history at the Fed (Board Member John Williams in 1937, for example).
HT Patricia Stefani
HT David Levey