Wednesday, June 08, 2011

Working at the Fed

From: When a Nobel Prize Isn't Enough 

"The Fed has to properly assess the nature of that unemployment to be able to lower it as much as possible while avoiding inflation. *If much of the unemployment is related to the business cycle — caused by a lack of adequate demand — the Fed can act to reduce it without touching off inflation*…...We need to preserve the independence of the Fed from efforts to politicize monetary policy"."


This line of thinking is what characterizes the Fed's activity in the 2000's leading up to the financial crisis and likely at least partly is contributing to our anemic recovery (and hopefully not setting the stage for a second dip). I'm not sure how the Fed can truly achieve political independence without relinquishing its very political mandate related to unemployment.  While Diamond may have been qualified (a statement that Mankiw endorses) I'd prefer bringing back ThomasHoenig who's set to retire this year.

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