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Friday, October 28, 2005

Greg Mankiw: Questions Bernanke Must Be Asking Himself

Greg Mankiw, a professor at Harvard and former chair of President Bush's Council of Economic Advisers, has some questions for Ben Bernanke along with his guess about how Bernanke would answer. The questions cover how hard he should push inflation targeting, how outspoken he should be and the topics he should speak about, and whether to adopt a high or low profile that emphasizes the institution over the individual. It's nice to see Mankiw's emphasis on the Fed's independence and how political statements from the Fed chair endanger that independence:

Questions for Ben Bernanke, by N. Gregory Mankiw, Commentary, WSJ: ...[S]enators and their staffs are busy compiling questions for Ben Bernanke. The most intriguing questions, however, are ... the questions that Mr. Bernanke must be contemplating quietly on this own. There should be no doubt in anyone's mind that Mr. Bernanke is superbly qualified for the job. I have known Ben for 20 years, and there is not a monetary economist alive who commands more respect among professional economists for his deep, broad intellect and rock-solid judgment. (OK, maybe Milton Friedman, but at the age of 93, he's probably not available.) ... Here are three questions he must be asking himself.

"How can I advance inflation targeting?" ...Mr. Bernanke has long advocated inflation targeting, under which a central bank sets a numerical target for the inflation rate. He will soon be in a position to put his monetary policy where his mouth is. This will not necessarily be easy. ... it is supported by many U.S. economists, but the support is not universal. Alan Greenspan has long been a skeptic. More importantly, so is Mr. Greenspan's close protégé Donald Kohn, who ... commands broad respect among the other members and the Fed staff. Some recent news reports have suggested that inflation targeting would mean a big change in policy from the Greenspan era. That is not right. Starting where we are today, a switch to inflation targeting is not so much a change in monetary policy as it is a change in the way the Fed communicates about monetary policy. ... As former Fed governor Laurence Meyer pointed out, anyone who doesn't know that Mr. Greenspan is aiming for a measured inflation rate of about 1% to 2% is just not paying attention. The evolution toward inflation targeting under Mr. Bernanke can, therefore, be very gradual. ...

"How broadly should I offer opinions?" Mr. Greenspan has not been shy, over the years, about expressing opinions on a broad range of economic issues. This proclivity has at times made some Fed staff cringe. The political independence of the Fed is among the institution's most basic values. Whenever the Fed chairman opines on a politically charged topic, he puts the Fed's independence at risk. It was created by Congress -- and it can be taken away by Congress. ... Mr. Bernanke must decide for himself how far he is willing to go. ... Here is my guess about what Mr. Bernanke will decide. He will be prepared to talk not only about monetary policy but also about issues related to financial stability, such as regulation of Fannie Mae. He will be willing to explain the views of professional economists when there is a consensus. ... But he will stay away from issues that are distant from monetary policy, controversial among economists and politically divisive. The repeal of the estate tax, for instance, is not an issue that the future Fed chairman is likely to comment on anytime soon.

"How high a profile should I adopt?" Alan Greenspan is a rock star, at least by the standards of the American Economic Association. ... Much of the general public may fail to understand how monetary policy functions, but they still know it is important -- and that Mr. Greenspan is the man. That is why the choice of his successor was anticipated so intensely. Yet the truth is that monetary policy is set not by a single person, but rather by a large committee supported by one of the most talented staffs of professional economists working in government. If the next Fed chairman accepts a lower public profile, the true nature of the Fed could be more widely appreciated -- and that would be a step in the right direction. Monetary policy is not so complex that we need an inscrutable wizard to do it well...

The most negative assessment I have ever heard about Ben Bernanke, from one of my colleagues, is that he is "a bit boring." For an economist, boring is an occupational hazard. For a central banker, however, it is just the ticket. The central bank's job is to create stability, not excitement. ...

    Posted by on Friday, October 28, 2005 at 02:10 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1)


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