– Monetary Policy Returned Prices to Path Close to Mid-1990s
– GDP Target w/o Adjusting for Post-Crisis Slowdown Could be ‘Disaster’
WASHINGTON (MNI) – The price path “signature” indicates U.S.
monetary policy is “optimal,” as it has returned prices to a path close
to that seen in the mid-1990s, St. Louis Federal Reserve Bank President
James Bullard said Thursday night.
In a presentation entitled “Price Level Targeting: The Fed Has It
About Right,” Bullard noted that nominal GDP would seem to suggest
policy is too tight but should be adjusted to account for the historic
post-crisis slowing of the pace of growth.
“Nominal GDP targeting, without proper adjustment, could be a
policy disaster,” Bullard said in a slide in his presentation to the
Economic Club of Memphis.
“Nominal GDP, the combination of the aggregate price level and real
GDP, is about on target if properly adjusted for the Reinhart-Rogoff
effect,” he said, citing the authors of a study on the history of
financial crises show economic growth is slower after a crisis.
Bullard said the U.S. economy seems to have responded just as it
should have if monetary policy reacted in just the right way to the
enormous shock of the financial crisis.
“The FOMC has in fact essentially behaved as if it was price level
targeting. In this sense, policy since 2008 looks close to optimal,” he
said, calling this “a singular achievement of recent monetary policy.”
He noted that simple versions of a leading macroeconomic theory
suggest the price level path can provide a “signature” for optimal
monetary policy, if it returns to its previous path.
“The U.S. experience seems to satisfy this signature test, because
the actual aggregate price level in the U.S. is quite close to the path
established beginning in the mid-1990s,” Bullard said.
** MNI Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]