Friday , January 22 2021
Home / S. Sumner: Money Illusion / Robert Hetzel on the Fed’s new policy

Robert Hetzel on the Fed’s new policy

Summary:
Bob Hetzel has a new Mercatus paper that discusses the Fed’s new “flexible average inflation targeting” policy regime. He worries they may eventually overshoot to excessively high inflation. I’m less worried (medium term), but agree with his conclusion: The newly announced strategy commits the FOMC to expansionary monetary policy to lower the unemployment rate to its lowest sustainable level as indicated by a persistence of inflation above the long-run 2 percent target. The announced strategy, however, leaves vague how the FOMC will then return inflation to the 2 percent target. One possible way to ensure the long-run discipline required to maintain price stability would be to accompany the policy with a long-run path for the price level. I see level targeting as a

Topics:
Scott Sumner considers the following as important:

This could be interesting, too:

Tyler Cowen writes Scott Alexander’s Substack

Tyler Cowen writes That was then, this is now, now it’s now again

Tyler Cowen writes Thursday assorted links

Tyler Cowen writes Federal minimum wage of ?

Bob Hetzel has a new Mercatus paper that discusses the Fed’s new “flexible average inflation targeting” policy regime. He worries they may eventually overshoot to excessively high inflation. I’m less worried (medium term), but agree with his conclusion:

The newly announced strategy commits the FOMC to expansionary monetary policy to lower the unemployment rate to its lowest sustainable level as indicated by a persistence of inflation above the long-run 2 percent target. The announced strategy, however, leaves vague how the FOMC will then return inflation to the 2 percent target. One possible way to ensure the long-run discipline required to maintain price stability would be to accompany the policy with a long-run path for the price level.

I see level targeting as a way of permanently ending the longstanding and counterproductive debate between hawks and doves.

On another topic, David Beckworth has a new podcast where he interviews me on what I call the “Princeton School” of macroeconomics, by which I mean the work done by Krugman, Bernanke, Woodford, Eggertsson and Svensson back in the late 1990s and early 2000s. I see Krugman’s 1998 paper as perhaps the most important macro paper of the past 40 years, providing the best framework for understanding 21st century monetary policy. I plan to write a paper on this topic, and as usual I’ll have a slightly unconventional take on the subject.

PS. I also have a new piece in The Hill, which criticizes our response to Covid-19.


Tags:

 
 
 
Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

Leave a Reply

Your email address will not be published. Required fields are marked *