Category Archives: Federal Reserve

Scott Sumner on the Fed’s mistakes

The Cato Institute is hosting a discussion this month of the extent to which monetary policy may have contributed to our current economic problems. In the lead essay that appeared on Monday, Professor Scott Sumner of Bentley University suggested that the Fed erred in allowing nominal GDP to grow as slowly as it did.

My response

appeared this morning. I agree that faster growth of nominal GDP would have been a good thing, but argue that, particularly if you start the clock in the fall of 2008, the Fed lacked the tools to prevent a decline in nominal GDP.

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The market-perceived monetary policy rule

Stanford Professor John Taylor has suggested that monetary policy could be summarized in terms of a simple rule, lowering interest rates when output is too low and raising them when inflation is too high. A number of academic papers have investigated this rule from the perspective of describing what the Federal Reserve has historically done. In a new paper co-authored with Federal Reserve economist Seth Pruitt and Office of Immigration Statistics economist Scott Borger, I take a look at what monetary policy rule the market perceived the Fed to be following over different historical periods.

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Looking for an exit: Part 2

In my previous post I commented on Ben Bernanke’s recent communication of the Fed’s exit strategy for getting its balance sheet and daily operations back to historical norms. I suggested that one necessary ingredient to convince the public that we will see a return to a stable monetary regime would be a credible explanation of how the United States government will be able to meet its enormous current and implicit future fiscal obligations. Today I’d like to discuss a second element that I feel is missing from the exit strategy articulated by Bernanke, and this is a compelling vision of what a healthy financial market not propped up by the Treasury and the Fed would look like.

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