Alan Blinder Asks And Answers

From Stan Jonas, founder of the hedge fund Dutch Book Partners, I get the heads up on a new paper from Alan Blinder titled "Monetary Policy Today: Sixteen Questions and about Twelve Answers."  Here are the questions, and my interpretation of the answers:

1. What is the proper objective function for monetary policy?

Answer: 2% on core inflation, plus or minus a bit.  That, and the Non-Accelerating-Inflation Rate of Unemployment -- NAIRU.

2. How transparent should the central bank be?

Answer: As transparent as possible.  (And that would include announcing an inflation target, and articulating forecasts based on the presumed path of policy.)

3. Should the central bank be an inflation targeter, as that term is commonly used?

Answer: See #2.

4. Should monetary policy decisions be made by a single individual or by a committee--and, if the latter, what type of committee?

Answer: A committee, and one where the rank of the person at the head is somewhere below "God."

5. Should the central bank also regulate and/or supervise banks?

Answer: Who knows?

6. Is the proclivity of central bankers to avoid policy reversals appropriate?

Answer: Let's talk. (Precisely: "The operational question here is: Should the advisability of reversal aversion be a subject of debate? And my answer is yes.)

7. Does the revealed preference of central bankers for gradualism make sense?

Answer: Probably.

8. Is “fine tuning” possible after all? And if so, should central bankers attempt it?

Answer: Maybe, but only as long as you don't overdo it (although no one is really sure what that might mean).

9. Should central banks lead or follow the financial markets?

Answer: Lead.

10. Should central banks in floating exchange rate regimes intervene in the foreign-exchange market?

Answer: Sometimes.

11. Should central banks use derivatives in the conduct of monetary policy?

Answer: Quite possibly (though we should probably take it slow and easy).

The next two items are less questions than challenges to the state of our knowledge about how monetary policy works:

12. Transmission through the term structure of interest rates

13. Transmission through the exchange rate

Blinder concludes that the state of our knowledge is not so great, and we really ought to work on this a little harder.  OK. Back to the traditional question format:

14. How should the central bank deal with asset-market bubbles?

Answer: No.

15. How should the central bank deal with the zero lower bound on nominal interest rates?

Answer: We should think about price-level targeting.

16. Do the world’s giant central banks have global responsibilities?

Answer: Good question.

This article is a terrific summary of the important questions about the design and conduct of monetary policy.  I wish I had written it, which I suppose is my highest recommendation.