Category Archives: monetary policy

Recent “U-turns” in Central Banks’ Forward Guidance Were Avoidable

Share Button

          The Federal Reserve and the Bank of England have each recently backed away from “forward guidance” that they had given earlier in the form of thresholds for the unemployment rate.   As a result of their changes in emphasis, they are both being accused of confusing the financial markets.

The Fed at the end of 2012 had said that it planned on keeping monetary policy easy at least until the unemployment rate had fallen below 6 ½ %.     The Bank of England in mid-2013 had made a similar statement, with a threshold figure for UK unemployment of 7%.    read more

Share Button

Stan Fischer, the Fed, and Sub-par US Growth

Share Button

      Now that Janet Yellen is to be Chair of the US Federal Reserve Board, attention has turned to the candidate to succeed her as Vice Chair.  Stanley Fischer would be the perfect choice.   He has an ideal combination of all the desirable qualities, unique in the literal sense that nobody else has them.  During his academic career, Fischer was one of the most accomplished scholars of monetary economics.  Subsequently he served as Chief Economist of the World Bank, number two at the International Monetary Fund, and most recently Governor of the central bank of Israel.   He was a star performer in each of these positions.   I thought in 2000 he should have been made Managing Director of the IMF.   read more

Share Button

Japan’s Consumption Tax: Take it Slow and Steady

Share Button

Japan’s consumption tax rate is scheduled to increase substantially in April (from 5% to 8%).  The motive is to address the long-term problem of very high debt.  (Takatoshi Ito has stated the case in favor of the tax increase.)  Prime Minister Shinzō Abe has apparently decided to go ahead with it.   Many observers, however, are worried that the loss in purchasing power resulting from the sharp increase in the sales tax rate will send the Japanese economy back into recession.

It is very reminiscent of April 1997.   I remember Larry Summers, who was then Undersecretary of the US Treasury, repeatedly warning the Japanese government that if it went ahead with the consumption tax hike that was scheduled for that date, Japan’s economy would go back into recession.  I was in the US government then too.  As the date drew near, I asked Summers why he persisted in offering Tokyo this unwanted advice, given that the prime minister of the day was clearly locked into the policy politically.    Summers told me that he knew he was unlikely to change their minds, but that he wanted to be sure the Japanese would realize their mistake when they went ahead with the tax increase and his prediction subsequently came true – as it did. read more

Share Button