Ryan Avent is puzzled:
Monetary policy: The zero lower bound in our minds: Mr Hall argued that:
- A little more inflation would have a hugely beneficial impact on labour markets,
- And a reasonable central bank would therefore generate more inflation,
- And the Federal Reserve as currently constituted is, in his estimation, very reasonable; therefore
- The Federal Reserve must not be able to influence the inflation rate.
Now, perhaps there was a political economy subtext to this argument; if so, I missed it.
Rather, he seemed to be saying (as others, like Peter Diamond, have intimated) that at the zero lower bound it is simply beyond the Fed's capacity to raise inflation expectations….
[I]t seems clear to me that the Fed has been successful at using unconventional policies to reverse falling inflation expectations. Why is Mr Hall—why are so many economists—willing to conclude that the Fed is helpless rather than just excessively cautious? I don't get it; it seems to me that very smart economists have all but concluded that the Fed's unwillingness to allow inflation to rise is the primary cause of sustained, high unemployment. And yet... this is not the message resounding through macro sessions. Instead, there are interesting but perhaps irrelevant attempts to model the funny dynamics of a macro challenge that actually boils down to the political economy constraints (or intellectual constraints) facing the central bank. Let's focus our attention on that, for heaven's sake.