With core inflation creeping higher, the focus on monetary policy necessarily increases. The question, of course: What is the right monetary policy?
Fed Chairman Ben Bernanke is the strategist in chief for managing the nation’s money supply. On paper, he’s eminently qualified, courtesy of his career as a professor of monetary economics at Princeton. The jury’s still out on his talents as practiced in the real world, however. But each day, another round of deliberations commence.
The latest exhibit offered for review comes by way of a
speech Bernanke gave today in Frankfurt, Germany. For those who give the chief the benefit of the doubt, the latest lecture merely reflects an academic’s overview of the history of monetary policy. No less was expected for a talk labeled “Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective.”
On first reading, the printed version of the talk lives up to its billing. Ben takes us on a whirlwind tour of monetary policy since the Fed’s 1913 founding. From the mistakes in the Great Depression to Friedman and Volcker and beyond, the current Fed head is nothing if not well-grounded in the evolutionary past that’s brought us to this monetary moment.
But skeptics, conspiracists and cranks may see things differently in today’s chat. For instance, might the Fed chief be laying the foundation to argue that the central bank’s influence on monetary policy is less than assumed? Consider, for instance, the following statements, as per today’s Frankfurt dialogue:
As I have already suggested, the rapid pace of financial innovation in the United States has been an important reason for the instability of the relationships between monetary aggregates and other macroeconomic variables.14 In response to regulatory changes and technological progress, U.S. banks have created new kinds of accounts and added features to existing accounts. More broadly, payments technologies and practices have changed substantially over the past few decades, and innovations (such as Internet banking) continue. As a result, patterns of usage of different types of transactions accounts have at times shifted rapidly and unpredictably.
Various special factors have also contributed to the observed instability. For example, between one-half and two-thirds of U.S. currency is held abroad. As a consequence, cross-border currency flows, which can be estimated only imprecisely, may lead to sharp changes in currency outstanding and in the monetary base that are largely unrelated to domestic conditions.
Also, consider this tidbit: “Although a heavy reliance on monetary aggregates as a guide to policy would seem to be unwise in the U.S. context, money growth may still contain important information about future economic developments.”
May? Hmmm. Sounds like one academic in government has a new strategy in mind. Details to follow…perhaps.