This policy signaling would reduce the anxiety among economic and financial actors (that is, reduced variability in the overnight rate) when contractionary policy deems that nominal interest rates must rise at some point down the road, putting a business cycle expansion in jeopardy.

It's all about expectations management via policy signaling to help the private sector forecast the future path of policy and pierce the nominal veil.

–Pingry

As for the sorry state of these FI's, I do not believe that there is any current bankruptcy mechanism in place to deal with them in an orderly fashion to prevent such spillovers. And the FDICA and the FDICIA of 1991 does not allow for an orderly failure of many FI's, like huge bank holding companies, insurance companies (Read, AIG….Epic Fail) and other parts of the nefarious shadaow banking system.

Also, I believe you're mentioning the failure to accommodate a productivity surge (The deflation in a growing economy argument). Now, we have debated this issue of monetary policy in the past here at Cafe Hayek, and if I remember correctly, you were not too fond of my endorsement of an explicit form of inflation targeting.

I'll skip the details because I'm afraid that others here will misinterpret it, but it boils down to this: To have an explicit nominal anchor in the form of an explicitly announced and credible inflation target is just fine to accommodate a growing economy because at low and invariable rates, people will be able to pierce the nominal veil. To allow for a productivity-based deflation, I really think, would come as a surprise and lead to a short-run income redistribution while unhinging the central bank's proper nominal anchor.

Do you believe that the public can truly pierce the veil of a short-run productivity deflation? I'm skeptical….over time, they could probably learn to deal with it, but why not just stick to a solid monetary policy strategy of inflation targeting advocated by those like Bernanke, Gertler, Mishkin, Woodford, etc. ? After all, as I have mentioned here before, I think I am closer to the truth in saying that wages and prices are pretty rigid in the short-run….and not as flexible as Austrians would have anyone believe.

I'm not doubting Calomiris's claim about the moral hazard argument…but banking and finance today is more sophisticated, when back in the first round of globalization, these institutions and markets were either non-existent, or unsophisticated. Today, finance is far more sophisticated and globalized, and I think that financial crises of the future will be even more powerful, ceterus paribus, via financial innovation and the modern development (and globalized nature) of finance and financial markets, both of which were far less important in the first round of globalization which Calomiris contrasts to this round of globalization. Indeed, as I have written here quite a few times, there is much to said about spontaneous disorder when financial innovation goes awry, and, again as I paraphrase Jean Tirole “This is what happens in markets with asymmetric information”

Finally, please correct me if I'm wrong, but you write about targeting a level of nominal GDP, no? The same argument which Scott Sumner makes? Well, do you further believe that we ought to target nominal GDP futures? I doubt that would work as a practical matter. Again, I think it's easier to have an explicit inflation target.

And I like Taylor and the Taylor rule, and I'm all for more rules and less discretion. Indeed, one of the nice things about an inflation targeting framework (Mishkin has written on this a lot) is that it allows for mostly rules, and only an occasional discretion, like, say, when we have a massive financial crisis and the Fed has to increase the money supply in a “gargantuan” amount to satisfy the public and prevent short-run interest rates from shooting up like a rocket, precisely when the economy is weak and FI's are fragile.

But let me just say that I think the Taylor rule was not a good strategy back then, and that Woodford was right; That a central bank's overnight rate could be kept at a particular rate for a longer period as a substitute for further rate cuts and the anxiety that would create among economic and financial actors when contractionary policy deems they must rise at some point down the road.

–Pingry

I think the new neoclassical synthesis is on point about this, while taking the best of Friedman's monetarism and rational expectations, and avoiding all this stuff about wages and prices quickly clearing markets int the aggregate.

–Pingry

Take it easy on BB. He had the unluck to 'be in the ring'. Mopping up the liquidity, ever so gradually, will not be such a difficult thing once recovery is on more stable grounds. Al/FOMC aggressiveness screwed it up in the earlier cycle.

BTW, why not try 1/8% moves, however symbolic, rather than being a slave to 1/4 %?

As for the sorry state of these FI's, I do not believe that there is any current bankruptcy mechanism in place to deal with them in an orderly fashion to prevent such spillovers. And the FDICA and the FDICIA of 1991 does not allow for an orderly failure of many FI's, like huge bank holding companies, insurance companies (Read, AIG….Epic Fail) and other parts of the nefarious shadaow banking system.

Also, I believe you're mentioning the failure to accommodate a productivity surge (The deflation in a growing economy argument). Now, we have debated this issue of monetary policy in the past here at Cafe Hayek, and if I remember correctly, you were not too fond of my endorsement of an explicit form of inflation targeting.

I'll skip the details because I'm afraid that others here will misinterpret it, but it boils down to this: To have an explicit nominal anchor in the form of an explicitly announced and credible inflation target is just fine to accommodate a growing economy because at low and invariable rates, people will be able to pierce the nominal veil. To allow for a productivity-based deflation, I really think, would come as a surprise and lead to a short-run income redistribution while unhinging the central bank's proper nominal anchor.

Do you believe that the public can truly pierce the veil of a short-run productivity deflation? I'm skeptical….over time, they could probably learn to deal with it, but why not just stick to a solid monetary policy strategy of inflation targeting advocated by those like Bernanke, Gertler, Mishkin, Woodford, etc. ? After all, as I have mentioned here before, I think I am closer to the truth in saying that wages and prices are pretty rigid in the short-run….and not as flexible as Austrians would have anyone believe.

I'm not doubting Calomiris's claim about the moral hazard argument…but banking and finance today is more sophisticated, when back in the first round of globalization, these institutions and markets were either non-existent, or unsophisticated. Today, finance is far more sophisticated and globalized, and I think that financial crises of the future will be even more powerful, ceterus paribus, via financial innovation and the modern development (and globalized nature) of finance and financial markets, both of which were far less important in the first round of globalization which Calomiris contrasts to this round of globalization. Indeed, as I have written here quite a few times, there is much to said about spontaneous disorder when financial innovation goes awry, and, again as I paraphrase Jean Tirole “This is what happens in markets with asymmetric information”

Finally, please correct me if I'm wrong, but you write about targeting a level of nominal GDP, no? The same argument which Scott Sumner makes? Well, do you further believe that we ought to target nominal GDP futures? I doubt that would work as a practical matter. Again, I think it's easier to have an explicit inflation target.

And I like Taylor and the Taylor rule, and I'm all for more rules and less discretion. Indeed, one of the nice things about an inflation targeting framework (Mishkin has written on this a lot) is that it allows for mostly rules, and only an occasional discretion, like, say, when we have a massive financial crisis and the Fed has to increase the money supply in a “gargantuan” amount to satisfy the public and prevent short-run interest rates from shooting up like a rocket, precisely when the economy is weak and FI's are fragile.

But let me just say that I think the Taylor rule was not a good strategy back then, and that Woodford was right; That a central bank's overnight rate could be kept at a particular rate for a longer period as a substitute for further rate cuts and the anxiety that would create among economic and financial actors when contractionary policy deems they must rise at some point down the road.

–Pingry

I think the new neoclassical synthesis is on point about this, while taking the best of Friedman's monetarism and rational expectations, and avoiding all this stuff about wages and prices quickly clearing markets int the aggregate.

–Pingry