Friday, October 16, 2009

A New Fed Attempt To Exonerate Itself From Responsibility For Crisis

David Altig at the Atlanta Fed tries to deny the Fed's role in the economic crisis with this argument:

1) The actual Fed funds rate follows (since 1988) some model that he has devised and which appears to be largely intended to follow actual Fed funds rate.
2) The Fed was successful in the late 1980s and the 1990s.
3) Because the Fed pursued such good policies in the past with this rule, they can't be blamed for current problems.

Since he doesn't provide much actual details of the calculations and since it is not in my view important anyway, I won't dispute point number 1.

Point number 2 however is incorrect. A smaller bubble did arise in the late 1980s, and in the 1990s we saw the great tech stock bubble, so I do not think Fed policy was successful then.

Point number 3 does not hold either. Not just because it can't be said that the Fed was successful with it, but also because it doesn't necessarily follow that because something was successful in the past it will be successful in the future. Having no heating will work well as long as the weather doesn't turn cold. And moreover, Altig's model wasn't actually used in the past, he just constructed it to fit the data.


Blogger Peter said...

Great post! Macroblog consistently justifies the Fed and the wisdom of its actions -- monetary policy was not too easy, inflation is low and falling, etc. In my view, macroblog reflects the paucity of intellectual discourse at the Fed. Thanks for giving David Altig's latest and particularly ridiculous post the discrediting it so richly deserves.

7:44 PM  

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