Thursday, October 21, 2010

Garrison on Bernanke and What to Expect from the Fed

Two days ago I discussed some of the implications I took from Ben Bernanke's recent speech at a monetary policy conference at the Federal Reserve Bank of Boston. The same day Roger Garrison, professor of economics at Auburn University had an excellent article explaining his take on what Bernanke said and what it all means. I'm happy to see that Garrison agrees with me while his treatment is more exhaustive. Garrision hits the nail on the head when he notes
Ironically, Bernanke argues in favor of deliberately creating a 2 percent inflation rate in order to be able to respond in conventional ways should a recession threaten. There seems to be no recognition that a Fed-engineered inflation and the resulting market distortions, especially the interest-rate distortions, are precisely what cause a recession to threaten. Or that true price stability might entail a pattern of prices, wages, and interest rates brought about by the market in the absence of monetary manipulation by the central bank.

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