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David Glasner on St. Louis Fed President Bullard "Defending the Indefensible"

The thoughtful David Glasner looks at one of the last of the dead-ender inflation hawks, James Bullard:

Bullard Defends the Indefensible « Uneasy Money: I am having a lot of trouble figuring out what he was up to in the op-ed piece he published in today’s Financial Times (“Patience needed for Fed’s dual mandate”) in which he argued that the fact that the Fed has persistently undershot its inflation target while unemployment has been way over any reasonable the rate consistent with full employment, is no reason for the Fed to change its policy toward greater ease…. Bullard cites a 2007 paper in the American Economic Review by Smets and Wouters “Shocks and Frictions in US Business Cycles.”… Here’s how Bullard characterizes the rationale for QE3 and explains how that rationale is undercut by the results of the Smets and Wouters paper.

Here is my account of where we are: the US economy was hit by a large shock in 2008 and 2009. This lowered output and employment far below historical trend levels while reducing inflation substantially below 2 per cent. The question is: how do we expect these variables to return to their long-run or targeted values under monetary policy? That is, should the adjustment path be relatively smooth, or should we expect some overshooting?… [I]t is reasonable to believe that output, employment and inflation will return to their long-run or targeted values slowly and steadily…. Wild dynamics would be disconcerting….

Based on a sample that included no shock to output, employment, and inflation of comparable magnitude to the shock experienced in 2008-09, Bullard is prepared to opine confidently that we are now on a[n optimal] glide path headed toward the economy’s potential output, toward full employment, and toward 2% inflation.  All we need is patience. But Bullard provides no evidence…. Nor does he provide any evidence… [of the] consequences of changing the policy rule underlying Smets-Wouters model from inflation targeting to something like a price-level target or a NGDP target…. I have no idea how Bullard can be so confident about what the Smets and Wouters paper can teach us about adopting QE3.