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Ben Bernanke at the Federal Reserve: What Can We Expect?: 

Ben Bernanke at the Federal Reserve: What Can We Expect? Henning Bohn Professor of Economics UC Santa Barbara

Ben Bernanke at the Federal Reserve What Can we expect?: 

Ben Bernanke at the Federal Reserve What Can we expect? Who is Ben Bernanke? Personality matters. Fed Policy is run by committees (Board, FOMC) Bernanke’s approach to monetary policy. Foundations: New Keynesian macro theory. His signature proposal: Inflation targeting. His views on asset prices, world savings, a/o key issues. Challenges: Dealing with the Unexpected. Setting Interest Rates - the Fed Funds target. Housing/mortgage problems: How will the Fed respond? The declining Dollar and the U.S. current account.

Who is Ben Bernanke? A personal perspective.: 

Who is Ben Bernanke? A personal perspective.

Ben Bernanke’s Monetary Policy: 

Ben Bernanke’s Monetary Policy How will he run the Federal Reserve? Easy to answer: Read his writings! On New Keynesian macroeconomic theory. On inflation targeting. On many other issues - usually find a publication. Do the academic writings matter? Yes, for credibility. And in New Keynesian theory Credibility is crucial.

Perspectives on Monetary Policy (1): New Keynesian Macro Theory: 

Perspectives on Monetary Policy (1): New Keynesian Macro Theory Inflation is economically harmful. Fed’s top priority: keep inflation low and stable. Fed policy influences real output and employment. Short run trade-offs between employment and inflation. Fed must be sensitive to business cycles. Note: Money-employment linkage involves credit conditions. Households/firms respond to expected inflation. If low inflation is expected, the Fed can more easily respond to cycles & keep interest rates more stable. Fed must maintain credibility (that inflation will stay low).

Perspectives on Monetary Policy (2): Inflation Targeting: 

Perspectives on Monetary Policy (2): Inflation Targeting Bernanke’s proposal on how the Fed should operate. Detailed in a Princeton Univ. book: “Inflation Targeting: Lessons from the International Experience.” Message: A specific target helps stabilize inflation at low “cost”. Will the Fed adopt an official inflation target? Open question. Objections based on the Federal Reserve Act. All Fed governors have an informal target. Growing support. Newest Fed Gov. Mishkin is a coauthor of Inflation Targeting. What exactly is the target? Several measures of inflation: CPI (consumer price index) or PCE (personal consumption expend. deflator)? Headline (all items) or Core (excluding food & energy)? Answer: Core PCE. Ben’s comfort zone: 1-2% growth.

Recent Inflation Data Core CPI: +2.3% (Apr.07). Down from 2.9% in Sep.06. Core PCE: +2.0% (Apr.07). Down from 2.4%. In Sep.06.: 

Recent Inflation Data Core CPI: +2.3% (Apr.07). Down from 2.9% in Sep.06. Core PCE: +2.0% (Apr.07). Down from 2.4%. In Sep.06.

Perspectives on Monetary Policy (3): Key Non-monetary Issues: 

Perspectives on Monetary Policy (3): Key Non-monetary Issues Clues how Bernanke would respond to economic problems Asset prices: Ignore bubbles and crashes, but do respond to the effects on inflation and employment. Recognize the Fed’s crisis-management responsibility. The U.S. current account deficit: Driven primarily by a “glut” of world savings. Fiscal policy: Preference for the Fed to stay silent.

What Could Go Wrong?: 

What Could Go Wrong? The real challenge: Dealing with the Unexpected! How would the Bernanke Fed respond? The “Slowdown” in Real Estate No direct response [unless it triggers a banking crisis or a serious threat of recession] Problem: Core-PCE includes rental cost. Rising at >3% rate. Potential for bank lending problems [if beyond sub-prime] Recognize the ‘Credit Channel’ - response to employment effects. Worst case: Fed will serve as ‘Lender of Last Resort.’ Potential for a U.S. dollar/current account crisis Benign view of imbalances - inclined to let the markets work. Key Issues: Rising import prices vs. employment effects.

Conclude: What Can We Expect? 5.25% Fed Funds rate target - On Hold.: 

Conclude: What Can We Expect? 5.25% Fed Funds rate target - On Hold. Federal Reserve Projections (Percentage changes - 4th quarter to 4th quarter.)

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