The Upper Bound in the Fed’s Head: Inflation
Continuing with one of my current hobbyhorses:
Ryan Avent reports on the American Economic Association meeting, with special attention to a presentation by Robert Hall:
Monetary policy: The zero lower bound in our minds | The Economist.
Mr Hall argued that:
A little more inflation would have a hugely beneficial impact on labour markets,
And a reasonable central bank would therefore generate more inflation,
And the Federal Reserve as currently constituted is, in his estimation, very reasonable; therefore
The Federal Reserve must not be able to influence the inflation rate.
… 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. …a macro challenge that actually boils down to the political economy constraints (or intellectual constraints) facing the central bank.
Emphasis mine. I, of course, am less charitable, and impute other motives.
Hat tip to David Beckworth, whose feelings I fully understand:
I found the whole affair so depressing that I wasn’t able to drag myself to many sessions.
Cross-posted at Asymptosis.
Steve – That depressing quote at the end is from Sumner, not Beckworth.
Cheers!
JzB
If it’s the case that Fed policy stalled the earlier disinflationary trend, and if it is also true that monetary policy works in an entirely symetrical way in in generating inflation and stemming disinflation, then the writer at the Economist has a point. The is a big chunk of assumption at work in both cases. The Fed has tentatively concluded that many prices are sticky downward above zero. That is to say, it’s easier to slow moderate price gains than it is to induce price declines for a wide range of goods and services. That’s why when the model suggests falling prices, they only get low, positive inflation. There is also a good but of suspicion that monetary policy is not symetrical in its workings, just as a lot of other economic factors aren’t symetrical. The writer has not mentioned that possibility, which bespeaks either ignorance or a bit of disingenuity.
When it comes to imputing sinister motives to the Fed, well, Hall knows some of those folks personally. He thinks they’d generate inflation if they could. I don’t know any of them personally, and I think some of them (Bernanke, Dudley, Yellen, Evans) understand the dynamic well enough to subscribe to Hall’s view, but others do not.
Also worth thinking about, I think, is that the mechanisms through which monetary policy work aim at stimulating demand. The Fed thinks that it has some control over whether than turns out to be real demand or inflation by maintaining low inflationary expectations, but I’ve never seen an effort to show how much control they actually have. Point is, if the mechanism through which the Fed could generate inflation is in working order, then the same mechanism should be able to generate real growth when the output gap is wide. If the Fed is having trouble generating real growth, why should we believe the Fed has much power to generate inflation?
Also worth thinking about, I think, is that the mechanisms through which monetary policy work aim at stimulating demand. The Fed thinks it has some control over whether demand turns out to be real demand or inflation by maintaining low inflationary expectations, but I’ve never seen an effort to show how much control they actually have. Point is, if the mechanism through which the Fed could generate inflation is in working order, then the same mechanism should be able to generate real growth when the output gap is wide. If the Fed is having trouble generating real growth, why should we believe the Fed has much power to generate inflation?