This from Tim Duy:
Bottom Line: Monetary policy might have a bigger impact on shaping the underlying growth rate of the economy than policymakers believe. Some of what they think is exogenous may be at least in part endogenous. Ultimately, within a certain margin, we will get the economy the Fed wants us to get. And right now we are getting the economy that is defined by central bankers living in mortal fear of any inflation rate greater than 2%. With the exception of a few policymakers, the cost of 2.5% inflation far exceeds the possibility of learning to what degree the underlying structure of the economy is exogenous or endogenous.
I increasingly believe that the Fed made a massive policy error in defining their mandate as 2% inflation. I think they believed it would give them more freedom to use new tools by solidifying inflation expectations. Instead, the target has placed policymakers in a straitjacket. It is Bernanke’s cross of gold.
My only quibble: It´s not that monetary policy “might have a bigger impact” but that it does have. And Tim recognizes that when he writes: “And right now we are getting the economy that is defined by central bankers living in mortal fear of any inflation rate greater than 2%”.
In this post I criticize Bernanke´s formal inflation targeting approach:
Note the irony. In trying to avoid the 1970s he (Bernanke) was “presented” with the 1930s! And I think that was because he “misinterpreted” Greenspan´s policy approach. But that´s not surprising because Greenspan himself didn´t know exactly what his “policy approach” was, just that it “worked”!
The panel below, if anything, confirms the view that the “Fed rules”. Since it closely controls nominal spending, it can gear the economy towards rising inflation like in the second half of the 1960´s, to almost perfect nominal stability like in the 1990´s (up to 2006) or to a “Great Recession or Lesser Depression” like after mid-2008.