Saturday, September 25, 2010

Professor Bernanke Vs Chairman Bernanke

Facing its lost decade in the nineties, Princeton professor Ben Bernanke advocated that the Bank of Japan Governor Masaru Hayami indulge in aggressive monetary loosening, including signaling a higher inflation target. He even went on to describe the Japanese monetary policy timidity as a "Case of Self-Induced Paralysis".

"Krugman and others have suggested that the BOJ quantify its objectives by announcing an inflation target, and further that it be a fairly high target. I agree that this approach would be helpful, in that it would give private decision-makers more information about the objectives of monetary policy. In particular, a target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ is intent on moving safely away from a deflationary regime, but also that it intends to make up some of the 'price-level gap' created by eight years of zero or negative inflation...

BOJ officials have strongly resisted the suggestion of installing an explicit inflation target. Their often-stated concern is that announcing a target that they are not sure they know how to achieve will endanger the Bank’s credibility; and they have expressed skepticism that simple announcements can have any effects on expectations.

With respect to the issue of inflation targets and BOJ credibility, I do not see how credibility can be harmed by straightforward and honest dialogue of policymakers with the public. In stating an inflation target of, say, 3-4%, the BOJ would be giving the public information about its objectives, and hence the direction in which it will attempt to move the economy. But if BOJ officials feel that, for technical reasons, when and whether they will attain the announced target is uncertain, they could explain those points to the public as well. Better that the public knows that the BOJ is doing all it can to reflate the economy, and that it understands why the Bank is taking the actions it does."

Now, faced with similar macroeconomic environment and prospects of a similar deflation-induced lost-decade in the post-Great Recession US, the Federal Reserve opposition to higher inflation target mirrors the policy "paralysis" that Prof Bernanke accused the BoJ of. Ironically, the same Ben Bernanke, currently Chairman of the Federal Reserve differs with Professor Bernanke, and lays out much the same reasons for opposing a higher inflation target.

"Such a strategy is inappropriate for the United States in current circumstances. Inflation expectations appear reasonably well-anchored, and both inflation expectations and actual inflation remain within a range consistent with price stability. In this context, raising the inflation objective would likely entail much greater costs than benefits. Inflation would be higher and probably more volatile under such a policy, undermining confidence and the ability of firms and households to make longer-term plans, while squandering the Fed's hard-won inflation credibility. Inflation expectations would also likely become significantly less stable, and risk premiums in asset markets--including inflation risk premiums--would rise. The combination of increased uncertainty for households and businesses, higher risk premiums in financial markets, and the potential for destabilizing movements in commodity and currency markets would likely overwhelm any benefits arising from this strategy."

1 comment:

Arvind said...

A lot, he would say, has changed between 1999 and 2010 and that, he has grown wiser, in the light of depression, during this period.