Six principles for Fed-Treasury Accord

Princeton Univ organised a conference – Monetary-Fiscal Policy Interactions, Expectations, and Dynamics in the Current Economic Crisis. It has some superb papers by some top econs.

For instance this paper (too technical for me, so left it midway) says most papers on fiscal mutliplier do not consider the zero-bound monetary policy situation (for instance see this paper presented in the same conference). As a result, we get fiscal multipliers much lower and it is not a multiplier at all (see this for a review). However, if we take a zero bound mon pol situation, fiscal multiplier is much larger (though I don’t think they give a precise number as it is still preliminary).

In this paperMarvin Goodfriend provides 6 principles for Fed-Treasury accord for fixing the credit policy used by Fed.

The Fed should adhere to a “Treasuries only” asset acquisition policy except for occasional and limited discount window lending to depository institutions deemed to be solvent.

The Treasury and the Fed should agree to cooperate, as soon as the current credit turmoil allows, to shrink the central bank’s lending reach by letting Fed credit programs run off or by moving them from the Fed’s balance sheet to be managed elsewhere.

The Treasury and the Fed should cooperate to guarantee that the use of monetary policy for the fiscal purpose of funding credit policy does not undermine price stability.

To strengthen the nation’s commitment to price stability, the Treasury and the Fed should agree on a low long run inflation objective.

The Treasury should help the Fed, by seeking congressional legislation if necessary, to secure the capacity of interest on reserves to provide a fully credible exit strategy from the zero bound on interest rate policy, regardless of the Fed’s credit policy commitments or the size of its balance sheet.

The credibility and effectiveness of monetary policy to act aggressively against deflation at the zero bound requires that the Fed and the public are both confident that interest rate policy can exit the zero bound promptly and aggressively against inflation if need be, whatever the Fed’s credit policy commitments.

Other papers in the conference also look quite good.

One Response to “Six principles for Fed-Treasury Accord”

  1. Conferences on Ongoing Crisis and Policies « Mostly Economics Says:

    […] Monetary-Fiscal Policy Interactions, Expectations, and Dynamics in the Current Economic Crisis ( I covered a paper here) […]

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