Julio Huato wrote: > You're right that > > the word "Keynesian" means a lot of things. If it means > > "non-Monetarist" or "non-New Classical," then inflation targeting is > > "Keynesian." If, on the other hand, it means some sort of commitment > > to "full employment" even in the short run, as in Keynes' original > > work, it's not. > > I was just thinking of the old challenged posed by Lucas and Sargent: > "rules versus discretion." Well, "discretion" won.
I don't think that the Fed leadership has ever endorsed rules. Even Volcker used "rules" as a cover to simply go with tight monetary policy (and to tell people he was tough). > My real point is that "inflation targeting" as a "strategy" for > monetary policy -- once one looks beyond the code words -- gives > plenty of short-run leeway to policymakers to either accomodate > full-employment, progressive Keynesianism or -- as people on this list > may worry about -- be a cloak to enable and rationalize military > profligacy. yeah, the explicit policy stance can easily be a lie. > Moreover, IMO, *in and by itself* a hawkish monetary policy doesn't > necessarily imply an overall contractionary economic policy or an > enrich-the-rich redistributive policy. There are other -- and more > decisive -- factors at play. ... in theory you're right, but in practice a hawkish monetary policy has been a crucial part of the ruling-class offensive against labor and other inconveniences. > If my instincts are right, there's a window of opportunity out there > -- a huge window -- for the strengthening of the workers' movement and > the left, broadly understood. If that happens, the Fed's behavior > will be constrained further. How long will the window remain open? I > don't know. But if we don't use the opportunity timely, we'll only > have ourselves to blame. I hope that there's room for the left, but that's merely a hope at this point. > > In theory, inflation targeting is based on the idea of the NAIRU (also > > known as the "natural" rate of unemployment). The idea is that if the > > Fed struggles to keep the inflation rate equal to, say, 1% per year, > > it can ignore other long-term goals. The free market will provide, as > > labor markets gravitate toward the NAIRU. (High unemployment leads to > > slowing inflation and in the usual story, falling inflationary > > expectations, reducing the amount of inflation at each unemployment > > rate.) Under this policy, the story goes, long-run equilibrium will > > be attained where the horizontal inflation-target line (in a graph > > with the inflation rate on the vertical axis and the unemployment rate > > on the horizontal) intersects the vertical long-run Philips Curve at > > the NAIRU. If the policy is pursued forever, the economy will stay at > > that long-term equilibrium except when shocks hit. These shocks need > > not be opposed, since the policy rule will allow the economy to return > > to its long-run equilibrium. > I don't know Bernanke personally. I've just read a couple of his > papers. But I have the impression that he's a pragmatic fellow with a > strong preference for empirical analysis over theory. So, yes, he > recognizes the NAIRU "paradigm" like a Catholic would confess on > Sunday morning only to sin the rest of the week. After all, NAIRU or > some steady-state unemployment rate follows from any general > equilibrium look at the economy. And, if you want to reason with most > economists, you ought to adopt their lingua franca, "theoretical" > benchmark, or whatever. > > But if NAIRU means Range(0.01, 0.1), depending on how you estimate the > "fundamentals," then it means nothing. The fact is that the theory of > NAIRU doesn't predict $u$ one way or another. So, the NAIRU, as *a > notion informing policy making* is the result of political haggling. > I'm not saying that reasoning and argument don't matter in policy > debates. I'm just saying that, in the flux of current circumstances, > reasoning and argument are heavily constrained by vested interests. yes, and this is always true. JD
