Tuesday, June 7, 2011

Ten Questions I Wish Ben Bernanke Would Answer Today

Mark Thoma cues us in on the hot issues to look for in Ben Bernanke's speech today.  Here are ten questions Bernanke will not answer in that speech, but I wish he would consider: 
  1. Does the recent decline in the Treasury break-even inflation expectations raise concerns for the Fed?
  2. On a per capita basis, domestic nominal spending is still below its pre-crisis peak level.  Should the Fed be concerned about this?  
  3. In past speeches you and other Fed officials have mentioned the Fed could raise the interest payment on excess reserves (IOR) as a way to prevent the large stock of excess reserves from being invested in higher yielding loans or securities.  In other words, you and other Fed officials have claimed the Fed can effectively tighten monetary policy by raising IOR. By that same reasoning, wouldn't that mean the Fed could lower the IOR to loosen monetary policy and thus, by implementing IOR in the first place in late 2008 the Fed effectively tightened monetary policy then?
  4. If Congress would sanction it, would you be interested in adopting an explicit level target over a growth rate target?  
  5. If so, would you go with a price level target or a nominal GDP level target? Explain your choice.
  6. Do you feel political pressure both inside the Fed and from Congress is constraining the Fed from making optimal monetary policy?
  7. Though the Treasury break-even inflation expectations series mentioned above is useful, one has to be careful in interpreting it because both aggregate supply shocks and aggregate demand shocks can influence it.   Wouldn't it be better to just cut to the chase and have a futures market for nominal GDP that would directly measure aggregate demand shocks? 
  8. How do you reconcile your aggressive recommendations for Japanesse monetary policy   in the 1990s with the Fed's relatively modest approach to U.S. monetary policy today?
  9. Why do you think that FDR's original QE program in the early 1930s was so much more effective  than the 2010-2011 QE2?
  10. At the September, 2008 FOMC meeting the Fed decided not to cut the federal funds rate because it was concerned about headline inflation.  In the press release it mentions that commodity prices were behind the rise in headline inflation.  By implication, then, the Fed failed to act because it was responding to a rise in commodity prices.  Do you see any parallels to today's environment?
Maybe someday we will know the answer to these questions.


  1. 1. No.
    2. Weren't not.
    3. Plosser will let us do this once Sarah Palin is inaugurated, and our inherent bias comes to an end.
    4. Ron Paul.
    5. See 4.
    6. Plosser and Ron Paul.
    7. Ron Paul.
    8. I'm a neoclassically-trained, Republican economist originally appointed by GW Bush, and there's a Democrat in the White House (albeit one who re-appointed me).
    9. I'll look into this when I'm back at Princeton.
    10. See 9.

  2. It seems to me that "peak" spending is very likely excessive spending: the argument for NGDP targetting is after all an argument to the effect that both excessive and deficient spending are disruptive in their own ways. This, in a nutshell, is why I remain unconvinced by many of the arguments in favor of continued monetary ease. There's a case for getting back to a long-run growth rate of spending, but not for returning to a peak that was itself among the causes of a bust.

  3. Anonymous:

    That was hilarious! Thanks for the laughs.

  4. George:

    I suspect you are right that the peak was probably too high, but I think a reasonable case can be made that we are still below any reasonable trend value for nominal spending. See the figures in this post where I demonstrate this view.

    With that said, I do not like the ad-hoc, non-systematic approach the Fed has used with its QEs. It creates uncertainty and further politicizes monetary policy. Far better had the Fed adopted an explicit, clearly communicated NGDP level target.

  5. Yes, I have thought some of them, particularly the sixth.
    very good (and melancolic) post.

  6. David, I have seen those pictures. The problem is that the trend itself appears to trend upward in the 2000s at least partly owing to the influence of rapid boom-period spending. It is problematic, in other words, to rely on an ex-post construction based on a moving average of some kind. Imagine using a "simulated" Taylor rule spending series just for the post-2000 period and then calculating the trend. What would it look like then? Would we still be below?

    Of course, if that is indeed something like what you have done, my particular concern is quite misplaced.