Thursday, April 26, 2012

Does Bernanke Think The Fed Made A Mistake By Allowing Inflation To Cross 2% During The Great Depression?

It would be so easy for Ben Bernanke to say: "We have a 2%/year inflation target, and also strive for maximum feasible employment and purchasing power by attempting to keep the unemployment rate close to what we believe to be its natural rate. Whenever the unemployment rate is below what we believe to be its natural rate, we expect inflation to rise and so are unhappy--and believe additional tightening is warranted--unless inflation is below its 2%/year target. Whenever the unemployment rate is above what we believe to be its natural rate, we expect inflation to fall and so are unhappy--and believe additional loosening is warranted--unless inflation is above its 2%/year target."

That's not what he says. Does he think that the Great Depression-era Federal Reserve made a mistake by allowing inflation to get above 2%/year after the 1933 Great Depression trough? It sure sounds like it:

Ben Bernanke: There's this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time.

I made two points at that time to the Bank of Japan. The first was that I believe that a determined central bank could and should work to eliminate deflation, that is, falling prices. The second point that I made was that when short-term interest rates hit zero, the tools of a central bank are not exhausted. There are still other things that the central bank can do to create additional accommodation. Read more....

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