Friday, December 18, 2009

A Question for Macroeconomists...

Is the Fed's Monetary Policy too tight? Should the Fed adopt an inflation target of around 2.5-3%, and do more Quantitative Easing? The Fed's unemployment forecast for Q4, 2010 is 9.3-9.7%, while it expects inflation to be 1.4-1.7%. Is this acceptable? And if so, why/why not? Are the risks of doing too much and too little really symmetric?

I look forward to hearing you weigh in on this key economic policy question.

Very Respectfully Submitted,

Thorstein Veblen



UPDATE: Tyler Cowen was the first to reply to a slightly different question (I emailed him first, and then simplified the question). He, not surprisingly, agrees. It speaks well of him that he would reply.

UPDATE2: Joseph Stiglitz responds (automatic) -- he is out of the office. He'd almost certainly want to see a slightly higher Fed target, but I guess we'll have to wait 'till Monday.

UPDATE3: Greg Mankiw replies: "Who are you, really?" To which I responded that I'm basically just a grad student who's adviser has a huge man-crush on Larry Summers ("Larry Summers is brilliant!"), as does virtually every other white non-Hispanic male economist in America, so this blog is anonymous so as not to screw myself on the job market next year...



The likes of Ryan Avent, Scott Sumner, Joseph Gagnon, Matt Yglesias, Brad DeLong, Paul Krugman, and Tim Duy are all pushing for the Fed to do more. I suspect Menzie Chinn supports this, and Tyler Cowen believes the Fed should do more as well. Calculated Risk is likely supportive. Mark Thoma thinks the Fed can do more, but that the focus should be on more fiscal policy. Fine, but the economists at the Fed should still be receiving a clear message that they are screwing up.

I'm seeing what other economists I can get to comment. I suspect no economists will want to be quoted on an anonymous blog w/ an incendiary title, and in any case are too busy writing and refereeing Very Serious academic papers to make any public pronouncements on Macro policy mistakes which are affecting millions of lives, but I'll at least give them the chance to prove me wrong.

We can then let the facts over the next year declare the winner.

Those who think the Fed should do more can get proved wrong is if hyperinflation breaks out which is so hard to combat that repeated increases in the Federal Funds rate and $1.5 trillion reduction in the Fed's balance sheet aren't enough to forestall massive inflation.

But that just doesn't sound like it's in the cards now, does it?

To make it fair we'll say the point where Fed critics lose is just 4%. (In reality, 4% inflation wouldn't exactly qualify as a Domesday scenario, especially if accompanied by much lower unemployment...) Let me know if you support the Fed and you think this is unfair...

5 comments:

  1. I also have a question will you please give its solution?? Assume that the Fed will deal only with commercial banks and the amount of the transaction is $50,000 while the required reserve rate is 5%. Explain and discuss the process that leads to the increase in US GDP. Please help

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  2. smartest spam ever :)

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  3. You know, perhaps you could be taken more seriously when you spell "whose" correctly (hint: it isn't "who's").

    The preposterousness of your critising Summers when you can't even spell is, really, astounding.

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  4. Don't worry, I'm sure you'll screw yourself plenty on the market. It seems unlikely you'll produce anything of value.

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