Here are some assorted musings:
1. I owe Fed chairman Ben Bernanke an apology. Based on David Wessel's book, Larry Ball's paper, and the inconsistencies between Bernanke's old and new work, I was convinced that Bernanke was being too nice of a guy at the Fed. Jon Hilsenrath, however, shows in a recent piece that I was wrong. Bernanke, in his own way, manned up and convinced the FOMC to do QE3. Yes, a few years too late and not quite a a NGDP level target, but it is a start. Bernanke now needs to finish his job by convincing the FOMC to now adopt a NGDP level target. See Matt O'Brien for more on how Bernanke transformed the FOMC.
2. Matt Yglesias reminds us that the Reserve Bank of Australia is probably the best central bank in the world. Australia has not had a recession in over 20 years, an outcome Yglesias attributes to sound monetary policy. A related question that has vexed me is how Australia has been able to run almost 60 years of current account deficits. Josh Hendrickson thinks that given the relatively stable macroeconomic environment in Australia, foreigner investors have come to view the Australian dollar as a reserve currency of sorts and are glad to hold Aussie assets. What do you think?
3. Apparently many observers, like CNBC's Rick Santelli, were upset that Ben Bernanke claimed in a recent Q&A that Milton Friedman would endorse his views. Joe Weisenthal reports:
[Bernanke] pointed out that Friedman advocated QE for Japan during its struggle against deflation and weak growth. He also recalled one of Friedman's most important lessons, that low interest rates...Bernanke said specifically, when citing the lesson of Milton Friedman: "We didn't allow the fact that interest rates were very low to fool us into thinking that monetary policy was accommodative enough."
As I have noted before, Milton Friedman probably would have advocated systematic, rules-based polices that would have restored aggregate nominal income to its pre-crisis path.
4. Andy Harless explains that the Fed is the one institution that could meaningfully respond to the worst case outcome for the fiscal cliff:
[I]t’s hard to think of any feasible monetary policy action that would both be strong enough and have a sufficiently quick impact to offset the fiscal cliff directly. But what matters more for monetary policy is not the direct effect but the effect on expectations. Surely the Fed could alter expectations of future monetary policy in such a way that the resulting increase in private spending would be enough to offset the decreased spending due to fiscal tightening.
He goes on to argue that the Fed adopting a NGDP level target that aims to put nominal spending back on its pre-crisis path would be just such a policy. However, he is not hopeful it will happen. Scott Sumner agrees. This discussion highlights the Fed's ability to offset adverse fiscal policy shocks. It is also highlights why it is hard to measure the size of the fiscal policy multiplier if the Fed is offsetting such fiscal policy shocks. However, if Harless is correct, we will have a natural experiment of sorts later this year that will allow us to get a better glimpse of the size of the fiscal policy multiplier.