Former Fed Chief Bernanke is now blogging at the Brookings Foundation. His first blog concerned low interest rates (
see here for his blog) .
Bernanke asks:
Why are interest rates so low? Will they remain low? What are the implications for the economy of low interest rates? If you asked the person in the street, “Why are interest rates so
low?”, he or she would likely answer that the Fed is keeping them low.
That’s true only in a very narrow sense. The Fed does, of course, set
the benchmark nominal short-term interest rate. The Fed’s policies are
also the primary determinant of inflation and inflation expectations
over the longer term, and inflation trends affect interest rates, as the
figure above shows. But what matters most for the economy is the real,
or inflation-adjusted, interest rate (the market, or nominal, interest
rate minus the inflation rate).
He points out that the Fed can't set long term rates.
The state of the economy, not the Fed, is the ultimate determinant
of the sustainable level of real returns. This helps explain why real
interest rates are low throughout the industrialized world, not just in
the United States. What features of the economic landscape are the
ultimate sources of today’s low real rates? I’ll tackle that in later
posts.
In his next post at Brookings, Bernanke takes issue with an idea that Larry Summers has raised, namely that the economy's slow growth is a result of secular stagnation (basically that advanced economies don't grow quickly).
Three of the most important objectives for economic policy are:
- Achieving full employment
- Keeping inflation low and stable
- Maintaining financial stability
Larry Summers’
secular stagnation hypothesis holds that achieving these three goals simultaneously may prove very difficult.
This second post created a bit controversy with other economists. It is interesting to watch these important policy economists battling it out in the blog-land.
I agree that watching all of these arguments play out in blog-land is incredibly interesting. I mean, after all the title of Bernanke’s piece on Summers is ever so subtly titled “Larry Summers is Wrong About the Economy,” and the picture that Bernanke chose of Summers to accompany the piece is well, less than appealing.
ReplyDeleteIn the end I think that Bernanke uses Summers’ lack of internationally rooted analysis as a way to unfairly undermine the secular stagnation argument. However regardless of their opinion on secular stagnation and subsequent long-term economic strategies, one important policy tool they both agree on is fiscal policy (though with varying durations) to increase aggregate demand thus increasing employment. I think this overlap in opinion is interesting to note, and points to the importance of fiscal policy happening alongside monetary policy.