The Federal Reserve in 2011 Debates Christina Romer's Ideas About the Need for "Regime Change": Weekend Reading

Weekend Reading: The Federal Reserve in 2011 Debates Christina Romer's Ideas About the Need for "Regime Change":

I believe that in a generation or two the histories of the Bernanke Fed are overwhelmingly likely to concentrate on two puzzles:

  1. The failure to seek an environment in which inflation was high enough to allow a Federal Funds rate of 5% or so at the [peak of the business cycle, so that Bernanke's successors would have room to respond to a downturn in aggregate demand.

  2. The failure to use the credibility of its commitment to low inflation long and painfully built up by Volcker and Greenspan to support policies to rapidly return prime-age employment to its normal share of the population.

In late 2011, in a context in which prime-age employment was severely depressed and not going anywhere, the failure to see these two as policy priorities that called for, well, "regime change" is likely to appear largely inexplicable, and to be judged harshly:

Employment Rate Aged 25 54 All Persons for the United States FRED St Louis Fed

FOMC November 1-2, 2011: CHAIRMAN BERNANKE: I’m sure many of you have seen some of the commentary on, for example, nominal GDP targets. Christina Romer made the point over the weekend that one potential advantage of something like a nominal GDP target is that it could be viewed as a regime change, and to the extent that it reflects a real change in how the Fed is doing business, it might have a more dramatic effect on expectations than something more incremental. That being said, of course, big changes are also dangerous, and that’s something we need to keep in mind....

MR. EVANS. I’m happy to see that there are policy approaches available to us that should produce economic outcomes that are vastly preferred to our current outlook, and as you just mentioned, Mr. Chairman, it’s easy to see why there’s a growing clamor among an impressive variety of outside experts calling for more aggressive action, like Christy Romer, Mike Woodford, Ken Rogoff, the staff at Goldman Sachs, et cetera. Outsiders have an easier time advocating these prescriptions. For us insiders, details matter for the implementation. But before we can even consider technical details, I think the first major issue to grapple with is this: Has our current policy framework limited our effectiveness because it’s not properly understood by the Committee in its fullness or by the public, or because we disagree on the particulars of our framework? I personally think this is a concern. I mentioned this back in August when I said I thought that there were cracks emerging in our policy framework. I won’t belabor this issue. I’ve given two speeches on the dual mandate and my interpretation of its implications for our policymaking....

MR. FISHER. Reference has been made to Ms. Romer. I thought that was an interesting article. However, I must tell you that all I got out of it was, “Be bold.” That was what her message was. I wasn’t convinced by her argumentation. I have listened very carefully to Ken Rogoff, who is on our advisory committee at the Dallas Fed and our Globalization and Monetary Policy Institute. I respect him enormously. And then, I observed the pushback that came from another person I respect enormously named Paul Volcker. I understand that Tobin made the arguments in the 1970s, but I also understand that no other central bank has attempted what we are talking about. You had a slight variation of price-level targeting in 1930 by the Swedes. We love to evoke the Scandinavians at this table. But it was not held for very long, and it was a variation of price-level targeting. To my knowledge, no central bank has adopted nominal income targeting. It is true that Tobin made the argument in 1970. It is true that Martin Feldstein agreed with it.

I did have Professor Feldstein down the other day to the Dallas Fed. He is completely against it presently. Why? Because he doesn’t think we are quite credible yet in having anchored—and this is his own personal view—our commitment to long-term price stability. I come back to long-term price stability. To me, that is the key variable. The flexibility around it is something that we need to define, and then we need to socialize it. Despite the interest that has been shown by Goldman Sachs and Christy Romer and others, I think we need to socialize it further....

CHAIRMAN BERNANKE. A number of people have mentioned Christy Romer’s piece, and she talked about the 1979 regime change. I actually think that’s the wrong example. As President Bullard pointed out, when Chairman Volcker changed the policy regime, in fact, it took a long time for people to appreciate it and understand it, and one implication of that is there was a long recession and real interest rates remained very high, and so on. But there are other examples, like 1933, when Roosevelt took the U.S. off the gold standard, and prices and asset prices changed almost overnight. There are other examples like the end of hyperinflations, and so on. There’s something sometimes about regime changes that has remarkable effects on an economy. I’m not saying that we know how to predict that, but that’s something that we haven’t really understood or really explored in this conversation. That being said, I think that there was a lot of agreement that there are a lot of practical issues associated with implementing such an intermediate target, including both the very long horizons over which they have to operate and the issues of communication and credibility...

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