Monetary policyA tale of two Bernankes

The scholar versus the chairman

TOMORROW, we will learn what the Federal Open Market Committee of the Federal Reserve has made of the past month's worth of economic data, and what action, if any, it has decided to take. Ahead of the occasion, Paul Krugman revisits Ben Bernanke's thoughts on Bank of Japan policy, circa 1999:


It's worth clicking over the read the whole excerpt. Then contrast that with Mr Bernanke's comments ten years later:


That was an answer the chairman gave in December, to the question of why the Fed hasn't set an explicit 3% inflation target as a response to the ongoing shortfall in economic activity. Let me highlight one sentence in particular:

Therefore, the Federal Reserve's policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.

It would seem that the Fed's aim is terrible:

Now, in fairness to Mr Bernanke, his previous policy advice came in the context of almost a decade of deflationary pressure in Japan, while the American disinflation is only two years old. Of course, as James Bullard, president of the St. Louis Fed, recently noted in a paper on the subject, the deflationary equilibrium can be a very difficult one to escape.

I don't know quite what to expect from the Fed this week, and I can't claim to have any understanding of the decisions that have been made so far. I'm sure that the FOMC is doing what it thinks is best. But I do know that Mr Bernanke was appointed—and reappointed—based in large part on his highly touted academic work on countercyclical monetary policy. And for now he is ignoring that work and failing at his stated aims. And that is a problem.

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