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Monetary Policy Indifference

August 12, 2011

William Jennings Bryan gets a bad rap in the history books because of his stance on evolution, but from an economic standpoint he would be better than most of politicans today because at least he understood how powerful monetary policy could be. I can’t find a single instance of Obama claiming we need more monetary stimulus in any of his speeches. And, other than Ron Paul, I don’t know the monetary stances of any of the candidates for the 2012 election. How is it that THE central issue for economic performance is almost completely ignored?

Obama recently appointed two candidates, who Tyler Cowen seems to like quite a bit. It’s very good news, but it took Obama far too long to pick them out. All that wasted effort on fiscal stimulus when the Fed unwound the whole impact simply by tightening monetary policy.

Of the two candidates, I am more comfortable with Richard Clarida. Jeremy Stein has a lot of papers about the finance sector and bank balance sheets. I think the Fed and Treasury focused way too much on the banks throughout the crisis and this seems to me to be a vote for continuing that policy. “Monetary Policy as Financial-Stability Regulation“? Hmm… I’d rather hear “Monetary Policy as Setting Stable Inflation/NGDP Expectations”.

Clarida on the other hand has some very reassuring phrases in the papers I have looked over, such as “given the prominent role that inflation expectations play in inflation dynamics, inflation inertia is the enemy of reflation once deflation sets in”, and “we show that the optimal policy implicitly incorporates inflation targeting.” I’d rather have someone with clearer dovish tendencies, but he should do fine.

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