Here is a direct quote from Ben Bernanke today.
“I guess the — the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction — a slightly increased pace of reduction in the unemployment rate?
The view of the committee is that that would be very reckless. We have — 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 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. 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. But, what is a Phillips Curve? 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. The Fed’s choices affects private sector investment and expectations of private sector trends influence the Fed’s current behavior. I mentioned this in a previous post and this triggered some disgruntled comments. It appears that macro economists are still learning about their subject. 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? As usual, I would suggest that we run some experiments to increase our knowledge base.