More on Ben Bernanke

The New York Times has an interesting article on Ben Bernanke's nomination as Fed chair. The article points out that in 2001 Bernanke (then a professor at Princeton, so perhaps not privvy to all the information the Fed had at the time) argued that the Fed was acting to aggressively against the coming recession. In fact, the Fed was right in believing a recession was in the works and Bernanke was wrong in thinking that the economy might be able to avoid one. On the other hand, a lot of economists argue that by keeping interest rates so low for so long, the Fed has allowed inflationary pressures to build up and also possibly created a housing bubble. The jury's still out. One disturbing passage: "Core inflation, which excludes food and energy and is closely watched at the Fed, has hit 2 percent, the upper limit of what Mr. Bernanke has called his "comfort zone."" If you put a gun to my head (please don't), I'd say that the Fed's current inflation "comfort zone" was around 2-3 percent (though we can't know for sure; one virtue of inflation targeting is the Fed would tell us). On the basis of that statement, it looks like Bernanke is setting us up for a tighter monetary policy than Greenspan would view as necessary.



All the usual blogs have commentary on Bernanke's selection, all positive. James Hamilton respects his intellect, Mark Thoma analyzes Bernanke's 1992 paper that convinced much of the economics profession of the importance of the federal funds rate rather than the money supply as the measure of monetary policy (two years later the Fed began targeting the federal funds rate explicitly), Macroblog assesses the chances that the Fed will adopt inflation targeting.



Back in the '80s there was a lot of interesting game theory-based research on Federal Reserve strategy. One common result was that new Fed chairs would usually find it necessary to take an excessively hawkish stand against inflation in order to build up credibility (presidents may launch small wars early in their terms for the same reason: Reagan in Grenada, 1983; Bush I in Panama, 1989; Bush II in Afghanistan, 2001; though of course in each case there are other explanations. Counterexample: Clinton in Haiti and Somalia, 1993-4 established a reputation as a weakling). Fortunately, financial markets seem to already have a lot of confidence in Bernanke's inflation-fighting credentials, so we may be spared.