Monday, May 9, 2011

The Fed's Communication Problem

Robin Hanson of the FT speaks to the Fed's communication problem:
[E]ven if the press conferences do improve how the Fed communicates, and dampen the volatility of market responses, the real problem is what the Fed communicates. The Fed still does not communicate two things: (1) a clear numerical objective for policy; and (2) any idea of the monetary policy path it expects to use to get to its objective.
Hanson notes that the reason for this lack of clarity is the Fed's dual mandate.  He cites research by Nicholas Herro and James Murray that shows the uncertainty created by this lack of clarity is costly to the economy.  If only there were a way to narrow the Fed's mandate that so that there would be increased clarity and improved macroeconomic stability.  Oh wait, there is a way.

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