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The Fed and Comparative Institutional Analysis


Ken Rogoff is not too impressed with the Fed’s critics. Restricting the Fed’s activities, or “worse” — I guess he means scrapping the Fed altogether — is “nonsense,” and “to single out Fed governors for missing the coming catastrophe is ludicrous.” He concedes that the Fed made some egregious mistakes leading up to the financial crisis (he doesn’t see credit expansion per se as playing any role), but argues that no one else saw it coming either. Here’s Ken’s list of people, places, and things just as incompetent as the Fed:

  • Congress
  • The IMF
  • “Central banks’ state-of-the-art macroeconomic models”
  • “[M]ainstream academic thinking – including the so-called real business cycle models and New Keynesian models – which assumed that financial markets operate flawlessly”
  • “[C]anonical macroeconomic models [that] do not adequately allow for financial-market fragilities” (he helpfully notes that “fixing the models while retaining their tractability is a formidable task”)

Well, I suppose I agree, though one can make a structural argument that Congressional control of monetary policy would be less bad, on average, than control by a technocratic elite facing particular governance and management problems. But talk about damning with faint praise! Ken’s argument is that the Fed follows the mainstream macroeconomic consensus, and since that entire consensus got it wrong this time, the Fed can hardly be blamed. The idea that the mainstream macroeconomic consensus might itself be fatally flawed isn’t even on the table.

The appropriate comparison is among alternative institutional arrangements, where the Fed is compared with a commodity standard, competing currencies, fixed rules, and other non-Fed options. But that’s a comparison the IMF’s chief economist clearly doesn’t want to make.


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