New Paper on the Greenspan and Bernanke Fed

John Ryan and Ryan Koronowski have a nice survey paper on the Greenspan and Bernanke Fed (Hat tip to Mark Thoma). The paper explains in a straightforward manner how the Fed works and considers its policy actions during the tenure of Greenspan and Bernanke. The paper draws upon the work of William White, Claudio Borio, and the other folks at the BIS as well as Martin Wolf. It provides a nice complement to David Wessel's "In Fed We Trust" and, among other things, would work well in a money and banking course.

Here is one excerpt from the paper that sounds like something I would say:

White argues that price stabilization which tries to avoid periods of deflation (what is characteristic for definitions of price stability as a central bank’s target) sometimes may be too expansionary and it may lead to an asset price bubble. This may happen in a situation of “good deflation” when prices decrease as an effect of some positive supply shocks such as rapid growth of productivity or – as recently – globalization. However, it is interesting in this context to ask to what degree monetary policy should be more accommodative in case of “bad deflation” – one induced by a financial crisis and falling demand - without risking it may turn out to have been too easy.

Another way of saying this is that the Fed should stabilize nominal spending. Rapid productivity gains create deflationary pressures. If such productivity gains are accompanied by an easing of monetary policy to offset the downward price pressures there will be a surge in nominal spending. On the other hand, deflationary pressures could also arise from a collapse in nominal spending. Fed policy should avoid both types of swings in nominal spending because such swings in conjunction with nominal rigidities (e.g. sticky prices) would cause output to move outside its sustainable or natural rate level. As I have noted before, though, the Fed failed to do this in the 2003-2005 period and more recently in the late 2008-early 2009 period. Stabilize nominal spending or more macroeconomic bust!