I spent a fair bit of time poring over the money multiplier, the base and the money supply among others so maybe I'll have something on that later. Naturally there arose some relationships (historically) that seemed a bit confusing to me so I'm being forced to hold that though. You know the story though - exploding base post-recession, tame price levels and a consistent money stock - and of course, the almost-90 degree spike in excess reserves; it's not hard to put the narrative together...
...in the meantime, however, I came across a Romer(s) draft that I think was presented at the AEA (I can't remember). It's a really interesting read and strongly recommended. What they basically do (in a lot more detail than it seems at first!), is analyze the perceptions of the power of monetary policy based on how the Fed has acted and reacted historically.
Now this would lead to two approaches - either you have an
1) "Overinflated belief" that contributes to an error. For example, banking too much in the power of monetary policy and getting it wrong, as in the mid 60's when a highly expansionary policy led to the inflation nightmare of the 70's.
2) A more relevant and recent idea that involves a sense of pessimism as to what monetary policy can accomplish - for example, believing that monetary policy would be ineffective and perhaps too costly in stimulating the recovery this time around.
The paper focuses on the latter and is aptly titled, "The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn't Matter". And naturally, the greatest error (if you could call it that), was the Great Depression when the money stock, price level and output all plummeted by about 25%! In such a case, the Romers argue that while there is no known evidence of an over-reaching belief, there is general consensus that an "overly pessimistic assessment of the Federal Reserve's ability to combat the downturn was critical in this period", i.e: that policymakers believed that expansionary action would involve high costs and lack effectiveness.
Essentially, the sense one gets from historical accounts of statements made is that the two vastly different eras weren't all that different when it came to policy fear. The typical response to doing more bordered around the fear of failure and a damage to credibility - that if a decision/move/action had little impact, the Fed's credibility would take a beating. Also, expansionary monetary policy approach can never seem to shake off the inflationary bogieman - the fear that easy credit encourages overborrowing and that an expansion "might well add unwise stimulus to the inflation of prices" or that "a further increase in excess reserves of member banks might give added impetus to existing inflationary tendencies" - all these are fears that have been voiced recently too.
Take the 70's - put into fresh perspective for me post the Volcker book. Once inflation gathered steam, a lack of faith or perhaps a fear of the cost of monetary policy played a role, the paper states, to NOT do anything about it. Tightening would bring up fears of output costs and after the mild recession of '69-'70 the Fed under Arthur Burns started to believe that the natural rate wasn't so low after all - and that more importantly, inflation was being unaffected by a drop in economic activity.
In any case, the more important issue is the relevance of this over the past few years which obviously leads us to believe that the Fed story has not and cannot be written just yet. It takes a much longer period of time to rightfully assess the impact of policies. It is in this section that the authors draw the parallel in beliefs across these three eras mentioned above. In each case, policy makers to an extend, believed that the tools at their disposal were perhaps not effective enough and simultaneously potentially costly.
There have been all kinds of new fears and questions raised. Why should there be a need for additional liquidity when "so much is presently lying fallow"? Another stresses the danger of a ZRP in increasing the misallocation risk of real resources and perhaps aid a rise in new bubbles. And of course, there is the old inflation demon, the fear that inflationary expectations will quickly spiral out of control.
Perhaps policy makers at times, try to ensure that the belief that monetary policy can accomplish everything does not gain traction as this diverts attention from other areas, as Bernanke stated most recently.
All this discussion however, leads the authors to ask what is desirable and key to a central banker's success. Hubris can have disastrous effects - as the belief that monetary policy could cheat the trade-off between low inflation and below-normal unemployment led to a pursuit of seemingly reckless policies. But hubris, in human nature always has these effects. What is more intriguing, and perhaps is the gist of this entire draft, is that humility can have equally disastrous consequences because it can translate into a pessimism and lack of belief that can further lead to inaction.
This leads to their conclusion, that a central banker needs to have a balanced appreciation of both the limitations as well as the capabilities of the power of monetary policy and a comprehensive understanding of what a particular policy can accomplish and when it can accomplish it.
...in the meantime, however, I came across a Romer(s) draft that I think was presented at the AEA (I can't remember). It's a really interesting read and strongly recommended. What they basically do (in a lot more detail than it seems at first!), is analyze the perceptions of the power of monetary policy based on how the Fed has acted and reacted historically.
Now this would lead to two approaches - either you have an
1) "Overinflated belief" that contributes to an error. For example, banking too much in the power of monetary policy and getting it wrong, as in the mid 60's when a highly expansionary policy led to the inflation nightmare of the 70's.
2) A more relevant and recent idea that involves a sense of pessimism as to what monetary policy can accomplish - for example, believing that monetary policy would be ineffective and perhaps too costly in stimulating the recovery this time around.
The paper focuses on the latter and is aptly titled, "The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn't Matter". And naturally, the greatest error (if you could call it that), was the Great Depression when the money stock, price level and output all plummeted by about 25%! In such a case, the Romers argue that while there is no known evidence of an over-reaching belief, there is general consensus that an "overly pessimistic assessment of the Federal Reserve's ability to combat the downturn was critical in this period", i.e: that policymakers believed that expansionary action would involve high costs and lack effectiveness.
Essentially, the sense one gets from historical accounts of statements made is that the two vastly different eras weren't all that different when it came to policy fear. The typical response to doing more bordered around the fear of failure and a damage to credibility - that if a decision/move/action had little impact, the Fed's credibility would take a beating. Also, expansionary monetary policy approach can never seem to shake off the inflationary bogieman - the fear that easy credit encourages overborrowing and that an expansion "might well add unwise stimulus to the inflation of prices" or that "a further increase in excess reserves of member banks might give added impetus to existing inflationary tendencies" - all these are fears that have been voiced recently too.
Take the 70's - put into fresh perspective for me post the Volcker book. Once inflation gathered steam, a lack of faith or perhaps a fear of the cost of monetary policy played a role, the paper states, to NOT do anything about it. Tightening would bring up fears of output costs and after the mild recession of '69-'70 the Fed under Arthur Burns started to believe that the natural rate wasn't so low after all - and that more importantly, inflation was being unaffected by a drop in economic activity.
In any case, the more important issue is the relevance of this over the past few years which obviously leads us to believe that the Fed story has not and cannot be written just yet. It takes a much longer period of time to rightfully assess the impact of policies. It is in this section that the authors draw the parallel in beliefs across these three eras mentioned above. In each case, policy makers to an extend, believed that the tools at their disposal were perhaps not effective enough and simultaneously potentially costly.
There have been all kinds of new fears and questions raised. Why should there be a need for additional liquidity when "so much is presently lying fallow"? Another stresses the danger of a ZRP in increasing the misallocation risk of real resources and perhaps aid a rise in new bubbles. And of course, there is the old inflation demon, the fear that inflationary expectations will quickly spiral out of control.
Perhaps policy makers at times, try to ensure that the belief that monetary policy can accomplish everything does not gain traction as this diverts attention from other areas, as Bernanke stated most recently.
All this discussion however, leads the authors to ask what is desirable and key to a central banker's success. Hubris can have disastrous effects - as the belief that monetary policy could cheat the trade-off between low inflation and below-normal unemployment led to a pursuit of seemingly reckless policies. But hubris, in human nature always has these effects. What is more intriguing, and perhaps is the gist of this entire draft, is that humility can have equally disastrous consequences because it can translate into a pessimism and lack of belief that can further lead to inaction.
This leads to their conclusion, that a central banker needs to have a balanced appreciation of both the limitations as well as the capabilities of the power of monetary policy and a comprehensive understanding of what a particular policy can accomplish and when it can accomplish it.
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