Tuesday, January 5, 2010

Follow-up on the "camp view" (amv)

In a recent post I advertised and commented on the 'camp view' perspective introduced by my Hohenheim-buddies. I recommend to change the description of the camps. In concrete, I mentioned that
"to me, your data seem to suggest that if there are two camps, than between those who believe that the Fed will follow the Taylor-rule, and a growing number of people who doubt that large-scale adjustments won't introduce policy and thus discretion. This also fits much better the Metzler-story. In this respect, the missing explicit target of the Fed may be partly responsible for the better long-run expectation performance in the euro area."
Now, Gary Becker and Kevin Murphy have written for the WSJ and seem to be a perfect case in point:

"In its efforts to combat the financial crisis and recession, the Fed created over $1 trillion of excess reserves at banks through various bailout programs and open market operations. When banks draw on these reserves for loans to businesses and households, there is a potential for the money supply to grow rapidly, possibly producing a substantial inflation. How hard the Fed will fight inflationary pressures through open market sales and other actions that raise interest rates is a significant source of uncertainty about future inflation and about the potential for monetary policy tightening to choke off the recovery.

The uncertainty about monetary policy has important political dimensions as well. The Fed now faces greater political pressures than at any other time in the past quarter century, as seen from the grilling the Senate Banking committee gave to Fed Chairman Ben Bernanke in deciding whether to approve his reappointment. These pressures may intensify greatly if, and when, future Fed actions to restrain inflation conflict with politicians' desires to prop up housing and the major government enterprises enmeshed in housing finance."
Thus, divergence in infaltion expectations are not due to different perspectives on theory (the models employed, respectively), but rather to regime uncertainty (matters of public choice).