Blogging a whole conference can be an exhausting affair. Two things I did not expect — sitting in on the press conference with Lacker and Bullard, and blogging the Lunch speaker from the BIS [Bank of International Settlements].
There were a lot of themes that went around. I’ll try to highlight a few of them, and add my own thoughts.
What is the proper mandate for the Central Bank?
The representatives from the Fed generally thought the dual mandate worked well. Most of the critics favored a single mandate of preserving purchasing power of currency, and no mandate of full employment. The reasoning varied there, but as Plosser commented, a dual mandate is what gives the Fed wiggle room to not be rules based, but discretionary. Others commented that the ability of the Fed to affect labor issues is poor.
Plosser also told us to consider the actual text of the dual mandate:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
He said it was interesting how it focused on monetary and credit aggregates as the tools to affect employment, prices, and long interest rates. I had to admit when I heard that, that the dual mandate is better and worse than I thought. Better because it focuses on money and credit as a unit. Worse, because it gives the Fed three disparate targets, and the Fed is bad enough in trying to hit stable prices. It doesn’t need distractions.
Beyond that, most agreed that adding even more targets for monetary policy was a really bad idea — effects on foreign countries, level of the currency, etc.
That said, Borio of the BIS suggested that monetary policy might be better off with a single mandate focusing on growth of liabilities to avoid financial crises, because financial crises cut economic growth severely. This is closer to the way that I think. The Fed should adopt a goal of modesty, and merely try to avoid messing things up, as they did with the flood of liquidity prior to the Great Depression, and in 2003-7.
Aiming for a moderate growth in total liabilities would probably be a better version of Friedman’s idea of a constant growth in M2.
Rules vs Discretion
This one was more agreed. Most favored a more rules-based monetary policy. As noted above, the main argument was over what the rule should be.
Central Bank Independence