Ryan Avent has a good discussion of Robert Hall´s paper presented at the JH Summit:
And so I think a real problem with the paper is the failure to lay out a rigorous account of the central bank’s reaction function. Mr Hall assumes that central banks are effectively doing all they can:
“It’s fairly obvious that monetary policy does not have instruments to restore ZLB economies to their normal conditions, else much more progress back to normal would have occurred”.
Yet that raises a critical question: how can we know this? How can we know that even more intervention would not have generated more progress back to normal? Similarly, how can we know that the path of the recovery doesn’t more or less reflect the Fed’s preferences? While we should certainly explore many different stories about the recovery, there is a parsimonious explanation for the economy’s behaviour sitting right in front of us: that inflation has been relatively stable because the Fed has targeted stable inflation, and the Fed’s choice not to raise inflation higher—and thereby reduce the real interest rate further—accounts for continued high unemployment. That should be the null hypothesis, and I’m not sure on what grounds Mr Hall rejects it. We should assume that a central bank with the ability to print money and buy extraordinary quantities of assets and foreign exchange can raise inflation if it wants to.
Instead of the word inflation I would use NGDP, because it´s spending that drives the process, with (some) inflation being a possible outcome. In the 1982-83 recovery phase, for example, inflation came down throughout. Today it would be a good sign if it went up a bit with the rise in spending.
And it´s well known that Ben – “making sure “it” doesn´t happen here” – Bernanke is a 1%-2% inflation guy! And that´s how the system works when everyone´s expectations of inflation is so well aligned, or “anchored”. So yes, the path of the recovery (for want of a better description) reflects the Fed´s preference pretty closely.
The chart below illustrates the recovery paths of post war cycles. The longer the time the economy spends in ‘coma’ the more important are the hysteresis effects…some permanent ‘brain damage’ is to be expected. But if 1%-2% inflation is maintained that´s all that matters!