Monday, June 25, 2012

Laurence Ball provides an explanation for why Ben Bernanke is pursuing (non)policies that disappoint Ryan Avent

Ryan Avent writes:

Fed members claim to care equally about the employment and inflation sides of their mandate, yet the unemployment rate has been at least 2 percentage points above the FOMC's estimated natural unemployment rate for nearly 4 straight years while inflation has scarcely wandered more than a half percentage point away from target since late 2009. Fed members claim that the 2% target is not a ceiling, but inflation has been below 2% much more often than it has been above it over the past 4 years, inflation is projected to be at most 2% in 2013 and 2014, and inflation is projected to be substantiallybelow 2% in 2012. In other words, the Fed is actively pursuing a policy of disinflation despite the fact that annual inflation is roughly at target while unemployment is well above its structural rate. That is, the Fed has gone from merely failing at its job toaggressively failing at its job.
Second, it is difficult to pin blame for this on anyone other than Chairman Ben Bernanke. The June policy vote ran 11-1, suggesting that Mr Bernanke is not getting the most expansionary policy for which he can find a majority. One is forced to conclude that this is the policy, and by extension the recovery, that Mr Bernanke wants.
All of this is particularly discouraging given that Bernanke's own magnificent scholarly work calls for the Fed to be more aggressive at the zero-bound, if necessary.  Lawrence Ball perhaps has some insights into what is going on:

"There is no doubt that Ben Bernanke's views on zero-bound policy have changed over time.  Once, he called for targets for long-term interest rates a "policy I personally prefer"; later, he "agreed 100%" with opposition to that policy.  Bernanke once advocated a 3-4% inflation target for Japan; as Fed chair, he says "that's not a direction we're interested in pursuing."...he no longer argues that a central bank can easily overcome the zero-bound problem "if the will to do so exists." 
At one level, the primary reason for these changes is also clear: Bernanke was influenced by the work of the Fed staff... 
...The puzzle about this history is why Bernanke so quickly and completely dropped his previous views and adopted those of Fed Staff.  We cannot be sure, but social psychology suggests two possible factors: groupthink and Bernanke's shy personality."
I am a big fan of Bernanke's scholarly work, and as a result was thrilled when he was appointed Fed Chair.  My understanding, however, is that he hasn't a whiff of arrogance about him, a characteristic that makes him a wonderful scholar and, from all I can tell, a wonderful human being.  But Chairman Bernanke really is the smartest guy in the room, and it would be nice if he remembered that. If the views he (along with Mark Gertler) developed over many years informed monetary policy, we would all be better off.