The Incredible Army of Brancaleone

Respected professors Thomas Cooley and Peter Rupert join Brancaleone´s army and write:

A Fed Call to Arms?

Given that the labor market now seems reliably recovered and GDP growth is steadily positive it seems to be time for Fed  to put aside its fear of the consequences and restore normalcy to monetary policy.  It is important not only because of the dangers of waiting too long but also because of the hidden costs of the current policy. Keeping the Federal Funds rate at zero for an extended period has distorted economic decisions and financial markets as investors search for yield and seem to take on more risk. It has also arguably increased income inequality precisely because of the wealth effect the policy was designed to create. Moving back to a normal monetary policy need not be disruptive and should enhance the Fed’s credibility going forward.  The graph below shows the Federal Funds rate implied by the Fed’s earlier announced goal of a 6.5% unemployment rate. While everyone realizes that is not the current goal it illustrates the case for a return to conventional monetary policy.

Brancaleone

Who decided that “normal” monetary policy is synonymous with (significantly) positive interest rate?

(Note: The term Armata Brancaleone is still used today in Italian to define a group of badly assembled and useless people)

One thought on “The Incredible Army of Brancaleone

  1. Well, the pair of professors may be in the dark as far as economics goes, but you have to admire their use of rhetoric. They cite “hidden costs” and mounting dangers. They also recite the idea that free enterprise is inherently unstable – – if interest rates become too low investors and business operators go bananas and take on too much risk.
    There may be an inherent problem here: raising interest rates of course cuts growth and inflation resulting in lower interest rates. A central bank cannot tighten its way to higher interest rates forever. Higher interest rates result in lower inflation and then lower interest rates — meaning investors and business operators will go bananas.
    Curiously, the investment boom in Japan happened in a period of higher interest rates

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s