Romer on Boosting the Economy

(cc photo by LateNightTaskForce)

Ezra Klein draws former CEA Chair Christina Romer further out on her frustration at government passivity in the face of mass unemployment. My favorite part:

You've also criticized the Federal Reserve for not doing more. What would you like to see them doing?

I'm teaching a course this semester on macro policy from the Depression to today. One thing I had the class read was Ben Bernanke's 2002 paper on self-induced paralysis in Japan and all the things they should've been doing. My reaction to it was, 'I wish Ben would read this again.' It was a shame to do a round of quantitative easing and put a number on it. Why not just do it until it helped the economy? That's how you get the real expectations effect. So I would've made the quantitative easing bigger. If you look at the Fed futures market, people are expecting them to raise interest rates sooner than I think the Fed is likely to raise them. So I think something is going wrong with their communications policy. They could say we're not going to raise the rate until X date. Those would be two concrete things that wouldn't be difficult for them to do. More radically, they could go to a price-level target, which would allow inflation to be higher than the target for a few years in order to compensate for the past few years, when it's been lower than the target.

You can download "Japanese Monetary Policy: A Case of Self-Induced Paralysis" (PDF) for yourself if you like.

I further note that though a price-level target would be radical in some sense, in another sense it's anything but radical. It's what Michael Woodford thinks we should do and he's the leading monetary theorist out there. Don't take my word for it, look at Greg Mankiw's blurb on his book. Level targeting is the solution that all the literature recommends, and it's just not being done.