Here is a direct quote from Ben Bernanke today.
“I guess the â€” the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction â€” a slightly increased pace of reduction in the unemployment rate?
The view of the committee is that that would be very reckless. We have â€” we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that weâ€™ve been able to take strong accommodative actions in the last four, five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. 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.”
So, this is a clean example of “game theory” at work. Â Â A student who got an A in econ 101 might think that this is simply a question of what is the slope of the Phillips Curve. Â But, what is a Phillips Curve? Â Does it really exist? or is it a statistical illusion?
Dr. Bernanke is aware that the Fed is a strategic actor and there is a “chicken” and “egg” element here. Â The Fed’s choices affects private sector investment and expectations of private sector trends influence the Fed’s current behavior. Â I mentioned this in a previous post and this triggered some disgruntled comments. Â Â It appears that macro economists are still learning about their subject. Â When experts disagree about what is “good policy” and when we know that we don’t know how a macro economy works, what is “good” public policy? Â As usual, I would suggest that we run some experiments to increase our knowledge base.