![]() prices and nominal GDP fell below their precrisis trends and never returned to trend. Later, during the Great Recession, both the level of U.S. He later recommended that the bank buy as many assets as necessary until the price level had risen sufficiently to make up for previous undershoots of the inflation target. Indeed, Bernanke titled one of his papers, “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” to indicate that despite having low interest rates, Japan’s problems were due to excessively tight monetary policy. A central bank can always buy more assets to inject more money into the economy. However, Bernanke showed that the Bank of Japan was not out of options. It had inflation below its 2% target, low nominal GDP growth, and near-zero interest rates. In the 1990s, Japan seemed to be in a bind. So, rather than looking at interest rates, a central bank should look at other things-inflation and nominal GDP-to assess whether monetary policy is on track. ![]() In those cases, the low interest rates reflect a contractionary policy, not an expansionary one. But low rates on their own can also be a sign that the market expects future inflation to be low. Nominal GDP, or total-dollar spending, fell in the last quarter of 2008 through the first half of 2009, giving teeth to the crisis and deeply worsening unemployment.įast-forwarding, could the Fed have done more once it had already cut interest rates and done QE? To answer that, we can turn to Bernanke’s research on Japan’s deep 1990s recession and its very low interest rates.Īll else equal, a central bank cutting its target interest rate is economic stimulus. Holding rates steady as the situation worsened accelerated the economic cool-down. Put differently, the Fed passively allowed monetary policy to tighten. It only cut this rate down to zero and initiated QE months after Lehman Brothers filed for bankruptcy. In the crisis’s earliest stages, during the spring and summer of 2008, it was reluctant to cut its target interest rate because it was mistakenly concerned about high inflation. It’s a fair point, but the Fed did make mistakes that allowed what might have been a relatively mild recession to turn into the Great Recession. With interest rates so close to zero, the conventionally held view was that the Bernanke Fed did the most it could to mitigate the crisis. It also engaged in quantitative easing, buying long-term bonds and mortgage-backed securities to keep those interest rates low as an additional stimulus. In late 2008, the Fed reduced the federal funds rate, its main interest rate target, to near zero as a means of stimulating the economy. While bailouts are far from optimal and should be avoided whenever possible (and perhaps the March 2008 bailout of Bear Stearns could have been avoided altogether), a collapse of the financial sector would have been catastrophic. In 2008, the Fed and the Treasury Department bailed out traditional banks as well as “shadow” banks (entities like insurance company AIG, which are not technically banks, but function like them). financial system and keep the economy afloat. ![]() Many observers, including MIT economist Olivier Blanchard, argue that the Bernanke Fed averted a new Great Depression in 2008 by taking radical steps to save the U.S. While the prize is for his research and not his time as a policy maker, it is worth comparing Bernanke the financial crisis scholar with Bernanke the policy maker. Given his expertise, Bernanke was uniquely suited to later be the most important central banker during the Great Recession. Famously, he showed that bank failures in the early 1930s disrupted the supply of credit in the economy, contributing to the Depression. The Nobel press release specifically points to his research on the Great Depression, but he published on many other macroeconomic topics as well. Of the winners, Bernanke is the most well-known.
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