Christy Romer for Fed Chairwoman

She shows an understanding Bernanke lacks. And nails it again.


The bottom line is that there is suggestive evidence that Roosevelt’s largely monetary regime shift was an important source of recovery. More work is needed, but the evidence is already pretty strong. If this were a clinical trial, one might stop it early and start treating patients.

On Fed monetary policy today:

But the truth is even these moves [Qe´s] were pretty small steps. With its most recent action, the Fed has pushed the edges of its current regime. And I am sure that given the opposition in Congress and the difference of opinion within the FOMC, even those measures were a struggle. Nevertheless, the key fact remains that the Fed has been unwilling to do a regime shift. And because of that, monetary policy has not been able to play a decisive role in generating recovery. To paraphrase E. Cary Brown’s famous conclusion about fiscal policy in the Great Depression: monetary policy has not been a strong recovery tool in recent years not because it did not work but because it was not tried—at least not on the scale and in the form that was necessary to have a large impact.

Japan today:

The new Governor, Haruhiko Kuroda, was thought to be committed to rapid monetary expansion going in to office. But the recent policy announcements were even more expansionary than almost anyone expected. The Bank of Japan changed its focus from the policy interest rate to the monetary base, and pledged to double the monetary base by December 2014.19 This change may not be as dramatic as Roosevelt’s going off the gold standard, but it is getting there.

And concludes:

There is a tendency for both policymakers and economists to say that humility is a key characteristic in a central banker. And, I agree that it is only right to admit that there is much we do not know about monetary policy and its effects on the economy. But, such humility can express itself in two very different ways.

Often humility can lead to paralysis. If policymakers are unsure about the effectiveness of a policy or fear there could be large costs, they may just do nothing or be willing to take only small steps. Why take risks when we don’t know if a policy will work?…

…But there is another much more positive direction that humility can take policymakers. Humility about how much we don’t know can lead policymakers to admit when something isn’t working. It can lead them to revise opinions and be open to new evidence. This positive kind of humility can lead to experimentation. Rather than assuming that doing nothing is the best course, policymakers can choose to act aggressively on the best evidence available, even if it is highly imperfect.

It seems to me that what we are seeing in Japan now is this positive kind of humility. Rather than rehashing the old arguments about why they can’t do anything about deflation and low growth, Japan is trying a grand experiment. It is based on the best evidence available, but that evidence is highly imperfect—one observation from a very different place and time.

I don’t know if the Japanese experiment with monetary regime change will work. But I am confident that we will learn a great deal because they had the nerve to try.

HT David Levey

8 thoughts on “Christy Romer for Fed Chairwoman

  1. How do you know that Bernanke lacks sophisticated understanding?
    It could be that Bernanke sees things exactly the same way market monetarists see things. But the problem is that he has to persuade the FOMC to take tiny baby steps in the market monetarist direction.
    So when he talks to the media and they ask why he isn’t being more aggressive, he has to pretend that the consensus FOMC decision has got it “just right.” Even if he doesn’t believe it.

    • Travis, surely Bernanke has the “sophisticated understandiing”. Maybe I should have said ‘he lacks Christy´s grit”. Bernanke appears to be very ‘risk averse’.

  2. What I think is most exciting about the Romer essay is a footnote referencing a forthcoming article entitled “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter”

    I think the title is as good and concise an explanation as I can think of as to why Krugman’s views on fiscal stimulus are so harmful.

    • I first noticed that Ryan Avent had great criticisms of Krugman, then I noticed that many of his criticisms were echoed by the……market monetarists!

      Market monetarism has really shown me the huge problems with some of Krugman’s positions. Krugman does deserve credit for endorsing a 4% inflation target. However, it doesn’t make sense to claim both (1) a 4% inflation target would really help and (2) the Fed is “out of ammo.”

      • Travis, Ryan Avent ‘learned’ from Scott and then ‘infected’ The Economist’ with the concept!
        Krugman is in favor of ‘more government’. That´s why he says with one hand that the Fed should do more (target 4% inflation, for example) but dismisses it straight away saying they wouldn´t do it.

  3. I read Krugman’s new piece in the NYRB:

    Pretty disappointing. Indeed, when he criticizes Reinhart and Rogoff, he’s actually arguing with a straw-man, because they’ve always been saying that inflation is a helpful thing that aids economic recovery.

    I wish R&R would be more vocal about the need for inflation, though. And they should be clear that what the globe really needs is for central banks to provide more aggregate demand. Inflation is just a result of more AD and thus resource utilization.

  4. Romer raises a key point: Doing little or nothing, usually under the banner of “prudence,” is sometimes the most dangerous course in any sphere of public policy, but including monetary policy.

    Timidity, dithering, indecision are destructive in monetary policy.

    I echo Travis’ concerns, of above. The FOMC is now an anachronism, and even a retardant to good policy. Worse, there are several FOMC members who are loose cannons, rolling around on deck and firing away.

    Time for a single Central Bank czar, and he gets hired and fired at President’s will.

    The most important macroeconomic policymaking tool should be accountable, transparent and democratic.

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