Phrasing to warm Sumner’s heart

Slide 1 shows the path, from the year 2000 to the present, of one key indicator of monetary policy, the target for the overnight federal funds rate set by the Federal Open Market Committee (FOMC).

Ben Bernanke

8 thoughts on “Phrasing to warm Sumner’s heart”

  1. Well, it should worry us, I think.

    Academics are quick to embrace Taylor-like descriptions of monetary policy and to cheer the benefits of tying one’s own hands, but for *some reason* Fed officials have always put themselves beyond such commitments, starting with Greenspan which laughed at any claim that he was an “inflation targeter”. The attraction of discretion and lacking any clear objection based on which you could be quantitatively judges is too great.

    If someone big at the Fed would come out and say that what they do is jerk around the interest rate as to hit these targets based off this idea of the underlying structure of the economy then you could actually go out and measure that and keep a scorecard. But that’s a dangerous thing to do. — There has always have to be some excuse or some escape clause that makes the Fed guiltless. Same goes for ECB and other central banks of smaller countries.

    That’s why I always thought that a) Greenspan and Fed groupies in academia are dangerous; and b) the fact that the Fed is financing most research into monetary policy is a conflict of interest.

  2. Look at the equation he’s putting those parameters on… it includes inflation as a separate term from the inflation gap.

    I’d like to see the data on your claim that most research is funded by the Fed.

  3. Funding would be hard to disentangle. I meant people. Many of the leading people in Central Banking or Monetary have been or are associated with central banks’ research divisions or as staff.

    Going by http://ideas.repec.org/top/top.cba.html and http://ideas.repec.org/top/top.mon.html I’d say that central bank employees are pretty influential.

    There’s also some anecdotal evidence that if you’re on their payroll you’re less likely to write critically about your bosses.

    I think there’s a case to be made that central banks should not have research divisions.

  4. Oh, I should advertise AC’s post at his own blog. AC click-throughs are a dime a piece? :-)

    I think he’s saying more than just “a lot of research is done at the Fed”. The claim is that most research is done there and, more importantly, research done be the Fed is most influential on Fed policy. Further, I think the claim is being made that the policy wing of the Fed feeds back on the research wing such that research produced supports or rationalizes policy decisions. Except when we’re explicitly trying to describe Fed behavior, we can all agree this would be a bad thing. I just don’t see evidence for any of these claims!

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