Mark's Monetary Matters
By Arnold Kling
Mark Thoma has many interesting links today, in part because the American Economic Association meetings have generated coverage in the media and in the blogosphere. For example, we have Ryan Avent paraphrasing Robert Hall:
(i) A little more inflation would have a hugely beneficial impact on labour markets,
(ii)And a reasonable central bank would therefore generate more inflation,
(iii)And the Federal Reserve as currently constituted is, in his estimation, very reasonable; therefore
(iv)The Federal Reserve must not be able to influence the inflation rate.
Point (iii) is the cornerstone of the argument. Avent continues,
Why is Mr Hall–why are so many economists–willing to conclude that the Fed is helpless rather than just excessively cautious? I don’t get it; it seems to me that very smart economists have all but concluded that the Fed’s unwillingness to allow inflation to rise is the primary cause of sustained, high unemployment. And yet…this is not the message resounding through macro sessions. Instead, there are interesting but perhaps irrelevant attempts to model the funny dynamics of a macro challenge that actually boils down to the political economy constraints (or intellectual constraints) facing the central bank. Let’s focus our attention on that, for heaven’s sake.
Responding to this, Tim Duy writes,
the Fed has chosen to focus on meeting the inflation side of the mandate… No mystery. No reason for vast intellectual expenditures. Price stability means 2% inflation, and if we can’t meet the unemployment target within that mandate, so be it.
Hall is, in effect, saying that his core beliefs about macroeconomics revolve around his view that Ben Bernanke is a nice chap. I side with Duy and Avent, not with Hall. The fact that the Fed has not done more to debase the currency since 2008 says that it does not want to, not that it can’t. It is in a policy-intentions trap, not a liquidity trap (I define a liquidity trap not as a low interest rate but as a situation in which the Fed can pump an infinite amount of money into the economy with no effect.)
I asked Perry [Mehrling] if the Fed was doing what it did for a period following the Sept. 2008 crisis, taking on ECB assets onto its balance sheet. The answer from him was yes, and this is a recent development, only a month old. He pulled it up on his android: as of Jan. 5 the Fed had acquired $99.8 billion in ECB assets, all within the past month.
Indeed, the monetary authorities seem to be following the 2008 playbook: bail out the banks, but by no means stimulate nominal GDP.