Why’d Ben Wait?

Stipulated that many of Ben Bernanke’s critics, particularly on the left, are elated that the Fed’s going to flex more muscle to boost the economy.

But if you detected a hint of annoyance among those same people, here’s why.For years before yesterday, monetary economists have been urging Ben Bernanke to take unorthodox steps to boost the economy. Moreover they found it puzzling that he kept not taking them. This was the same Ben Bernanke who’d pushed Japanese central bankers to do the same thing when their economy faced similar woes.

Specifically, for Japan, he endorsed an open-ended policy commitment to keep interest rates low until inflation increased. Here’s a good rundown, but the basic idea is that by raising expectations that inflation is around the corner, people sitting on idle resources might start investing them sooner rather than later, when prices will be higher.

Last year a small but elite group of monetarists began clamoring for the Fed to take similar steps. Now what the Fed did yesterday isn’t that robust. It didn’t commit to higher inflation, but it did commit to keeping interest rates low even after unemployment starts falling. So what you heard yesterday was relief, but also frustration that it took so long.

In 2011, economists at Goldman Sachs modeled the effect a robust use of the expectations channel would have on unemployment. Here’s what they found.

Again, what the Fed did yesterday isn’t as far reaching as the policies modeled in the graph. But you can see that these kinds of tools can bring down the unemployment rate very quickly. And yesterday only one member of the Fed board dissented from the new paradigm.

So why didn’t this happen sooner?

Masthead Masthead
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