WASHINGTON: Forget US monetary policy. For the blogosphere, the most entertaining part of the Federal Reserve's meeting this week was the clash between its chairman Ben Bernanke and Nobel prize-winning economist Paul Krugman.
Mr Bernanke took on Mr Krugman in his press conference on Wednesday and called his advice - in a story titled Earth To Ben Bernanke published a day earlier - to reduce unemployment by boosting inflation 'reckless'.
'The question is, does it make sense to actively seek a higher inflation rate in order to achieve' a slightly faster reduction in the unemployment rate, Mr Bernanke said to reporters after a meeting of the Fed's policy-setting Federal Open Market Committee (FOMC). 'The view of the committee is that that would be very reckless.'
BACKGROUND STORY
DIFFERENT PERSPECTIVES
'One of them has the responsibility of steering the economy through treacherous waters and the other has the luxury of sitting in his office and sending articles to The New York Times.'
Dr Anthony Karydakis, an adjunct professor of economics at New York University and former chief US economist at JP Morgan Asset Management
The FOMC on Wednesday said it would keep interest rates at super-low levels until at least 2014, and forecast the world's biggest economy would grow more than first stated this year while unemployment would continue to fall.
However, it held off unleashing any more stimulus measures for now, despite recent data showing that the big pick-up in job creation had slowed.
Mr Krugman, whom Mr Bernanke hired at Princeton University in 2000 when he was chairman of the economics department, said in The New York Times Magazine article that the Fed should raise its 2per cent inflation target to cut unemployment. Such a policy shift would align with Mr Bernanke's comment in 2000 that the Bank of Japan should pursue faster inflation to escape deflation, he said.
Japan's consumer prices fell 0.2 per cent that year.
'While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers,' Mr Krugman wrote.
'Higher expected inflation would aid an economy' because it would persuade investors and businesses 'that sitting on cash is a bad idea', he said.
Mr Bernanke denied that Fed policy contradicts his prior academic work.
'So there's this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies,' Mr Bernanke said. 'That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time.'
Mr Bernanke said the main difference between Japan's economic slump 15 years ago and the US today is that Japan was in deflation and the world's largest economy is not, with an inflation rate that is close to the Fed's objective.
The US today does not face a deflation threat, in part because the Fed expanded its balance sheet to US$2.88 trillion (S$3.62 trillion) through US$2.3 trillion in bond purchases, he said.
He said pushing the increase in prices above the Fed's 2 per cent goal would risk undermining inflation expectations and erode the central bank's credibility as a force for stable prices.
'We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we've been able to take strong accommodative actions in the last four, five years,' Mr Bernanke told reporters. 'To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.'
Mr Krugman, who won the 2008 Nobel Prize in Economics, said in a blog posting on The New York Times' opinion page on Wednesday that Mr Bernanke's response was 'disappointing stuff'.
Mr Krugman, 59, is well-known for his pro-growth stimulus view and has criticised Mr Bernanke previously for not taking more aggressive action.
'Krugman's views are not closely related to the reality in which Bernanke is forced to operate,' said Dr Anthony Karydakis, an adjunct professor of economics at New York University and former chief US economist at J.P. Morgan Asset Management.
'One of them has the responsibility of steering the economy through treacherous waters and the other has the luxury of sitting in his office and sending articles to The New York Times,' he said.
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