Mar

12

Here is a nice update on central banking's somewhat obscure inner dialogue by Gov. Kroszner, the Chicago academic:

…[E]xpectations are important in the inflation process…the improved conduct of monetary policy, by influencing the formation of expectations in a favorable manner, may account for many of the changes in inflation dynamics that we observe."

Or, as a very wealthy Wall Streeter once told me, it's all marketing, marketing, marketing.

…shifts in the way a central bank conducts monetary policy imply changes in the way the public forms its expectations…

Is public perception of inflation the new gold standard?

And noting the reduced efficacy of the Phillips curve, he cites,

 a reduction in the correlation between inflation and unemployment….

Finally, Kroszner says even the vaunted Taylor rule (targeting output gaps) isn't reliable, proposing a Greenspanian eclectic approach that, by no small coincidence, leaves the Fed with maximum latitude and scant benchmark accountability.

In today's economy, it is very difficult to know whether any given change in output or employment will have inflationary consequences. One lesson that is fair to draw, however, is that resource utilization generally does not tell us much about the future course of inflation over the next year or two. Rather, the near-term inflation outlook is more likely to be dominated by cost factors, such as productivity growth and the price of raw materials, than by the tightness of labor and product markets. Furthermore, the weak relationship between inflation and the unemployment rate means that it is probably more difficult than ever to gauge the economy's productive potential–and hence estimate so-called output gaps–especially in real time. In light of these uncertainties, prudent policymakers should take an eclectic approach and base their policy decisions on both a wide variety of indicators and views about how the economy may work and avoid a narrow focus on economic slack.

Meet the new boss. Same as the old boss.


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