Paper Criticizes Federal Reserve Approach, Suggests Radical Overhaul of Monetary Policy in the Crisis

The upshot of Ben Bernanke’s speech at the economic symposium at Jackson Hole, Wyoming, at least to most interested observers, is that the Federal Reserve will enact a new round of quantitative easing at their next policy meeting the week of September 10. This may be dependent on the jobs numbers that come out this coming Friday, but that’s the general consensus. One regional Fed President hinted that a “package” of measures could be enacted by the Fed, although this probably includes an extension of the communication on how long interest rates would remain close to zero (extending through to 2015) along with the new asset purchases.
So this would suggest that the Fed will take some steps to ease monetary policy. The problem is that, at the same policy symposium, leading monetary policy theorist Michael Woodford argued in a paper that the steps under consideration would be the exact wrong ones to take.

Mr Woodford’s 97-page paper is deeply sceptical about the efficacy of quantitative easing and endorses the idea of a central bank target path for nominal GDP. From his conclusion:
“Central bankers confronting the problem of the interest-rate lower bound have tended to be especially attracted to proposals that offer the prospect of additional monetary stimulus while (i) not requiring the central bank to commit itself with regard to future policy decisions, and (ii) purporting to alter general financial conditions in a way that should affect all parts of the economy relatively uniformly, so that the central bank can avoid involving itself in decisions about the allocation of credit. Unfortunately, the belief that methods exist that can be effective while satisfying these two desiderata seems to depend to a great extent on wishful thinking.”

Read more: http://news.firedoglake.com/2012/09/02/paper-criticizes-federal-reserve-approach-suggests-radical-overhaul-of-monetary-policy-in-the-crisis/