ADVERTISEMENT

Bernanke Adds Nuance to Independence Orthodoxy: Eco Pulse

Bernanke thinks coordination between central banks and fiscal authorities might be acceptable. 

Bernanke Adds Nuance to Independence Orthodoxy: Eco Pulse
A monitor displays Ben S. Bernanke, former chairman of the U.S. Federal Reserve, while traders work at the CME Group’s Chicago Board of Trade in Chicago, Illinois, U.S. (Photographer: Tim Boyle/Bloomberg)

(Bloomberg) -- Ben Bernanke,  the former Federal Reserve chairman,  caught people's attention in Washington last week when he presented a sweeping monetary policy paper declaring a new era in central banking. 

But readers and watchers alike might have missed the gold nugget he buried in page 36. The former Fed chairman details his theory that in extreme cases, coordination between monetary and fiscal policy makers might be OK. We’ve summarized and linked to the research in this week’s economic research wrap, which also includes a new feature – a weekly chart on a demographic issue. We finish it off with sections about inequality and consumer spending and the city-level Phillips curve. Check back each week for new and interesting findings from around the globe.  

The paper everyone is talking about

Monetary policy is entering a new era, Bernanke writes in his latest paper, and central banks facing a low-inflation, low-interest-rate world need to adjust. Proximity to the lower bound on interest rates means that the Fed and its peers could make greater use of new tools – Bernanke advocates for forward guidance and quantitative easing as “potentially effective supplements’’ while throwing some shade on negative interest rates and yield-curve control, which he sees as less useful or practical, especially in the U.S. He also looks at modifying the overall policy framework, making the case for temporary price-level targeting – aiming for a level, say 2 percent, on average, but only when rates are constrained by the zero lower bound – rather than raising the Fed’s inflation target. 

Bernanke buries the lede a bit. While he alludes to it in the intro, deep within the paper he explains that he thinks coordination between central banks and fiscal authorities might be acceptable. He’s clear that such teamwork should be a last resort, employed only if the Fed can’t hit the 2 percent inflation goal on its own. What’s more, the central bank should have the power to back out at any time, he writes. Still, this is a big statement, coming from the former head of an institution that defends its independence tooth and nail.

Monetary Policy in a New Era
Published Oct. 12, 2017 
Available on the Brookings Institution website

Weekly demo(graphic)

Bernanke Adds Nuance to Independence Orthodoxy: Eco Pulse

For all the talk about growing inequality in rich countries, it still trails that in developing regions, based on this post from the St. Louis Fed. 

How Does U.S. Income Inequality Compare Worldwide?
Published Oct. 16, 2017
Available on the Federal Reserve Bank of St. Louis website 

One reason to care about the income divide

Incomes are rising unevenly in the U.S., and that has implications for future growth and interest rates, according to Bank of America researchers. They find that for every extra 1 percent in total income that the top 10 percent of earners take home, real consumer spending growth decreases by 0.6 percent on the year. Given that the top 10 percent of earners raked in an extra 2.8 percent of income between 2010 and 2016, based on Fed data, consumer spending was probably held back by 1.7 percent. “All of this has probably made it harder for the Fed to get the economy back to full employment, prompting the Fed to keep policy easier for longer,”  according to the team, led by Michelle Meyer. 

U.S. Economic Weekly: Less equal = less spending
Published Oct. 13, 2017
Available to Bank of America mailing list
 

What cities say about wages

The Phillips Curve is alive but dampened, city-level data suggests. Since the recession, the traditional relationship where falling unemployment pushes up wages seems to have broken down, on a national level: joblessness is at its lowest since 2001, yet pay gains have been slow to materialize. By looking at city-level data spanning 1991 to 2015, San Francisco Federal Reserve researchers find evidence that wage growth is sensitive to changes in labor slack – though the relationship has weakened since 2009. It could be that lower-wage workers have been re-entering the labor market since the recession and holding back the aggregate data. If that’s the case, the trend could be poised to reverse as that effect dissipates. 

Has the Wage Phillips Curve Gone Dormant?
Published Oct. 16, 2017
Available on the San Franicsco Fed website 

To contact the author of this story: Jeanna Smialek in New York at jsmialek1@bloomberg.net.

To contact the editor responsible for this story: Alister Bull at abull7@bloomberg.net, Randy Woods