Prof Bernanke vs Chairman Bernanke: How Bernanke’s views have changed over zero interest rate policy?

This is a wow paper from Laurence Ball of John Hopkins Univ.

He says that Bernanke’s views over what central bank can do have changed considerably since Bernanke questioned BoJ policies in 2000 in this much read paper.

Ball says Bernanke was far more aggressive and forthcoming in his initial thoughts but has mellowed down since he joined Fed. What is even more interesting is that his list of policy tools under Zero policy rates has declined since 2000s.

The analysis starts with a puzzle about Ben Bernanke. From 2000 to 2003, when Bernanke was an economics professor and then a Fed Governor (but not yet Chair), he wrote and spoke extensively about monetary policy at the zero bound. He suggested policies for Japan, where interest rates were near zero at the time, and he discussed what the Fed should do if U.S. interest rates fell near zero and further stimulus were needed. In these early writings, Bernanke advocated a number of aggressive policies, including targets for long-term interest rates, depreciation of the currency, an inflation target of 3-4%, and a money-financed fiscal expansion. Yet, since the U.S. hit the zero bound in December 2008, the Bernanke Fed has eschewed the policies that Bernanke once supported and taken more cautious actions–primarily, announcements about future federal funds rates and purchases of long-term Treasury securities (without targets for long-term interest rates). 

What led to change in views? Well it was FOMC meetings and in particular research from Vincent Reinhart:

I find that they changed abruptly in June 2003, while Bernanke was a Fed Governor. On June 24, the FOMC heard a briefing on policy at the zero bound prepared by the Board’s Division of Monetary Affairs and presented by its director, Vincent Reinhart. The policy options that Reinhart emphasized are close to those that  the Fed has actually implemented since 2008; Reinhart either ignored or briefly dismissed the more aggressive policies that Bernanke had previously advocated. In the discussion that followed the briefing, Bernanke joined other FOMC members in agreeing with most of Reinhart’s analysis. Shortly after the meeting, Bernanke began writing papers that took positions very close to Reinhart’s–some with Reinhart as a coauthor. Clearly, the analysis of the Fed staff in 2003 was critical in changing Bernanke’s views about the zero bound.

What is even more interesting is what drove this change? well it is because of group-think and Bernanke’s shy personality..

This question is difficult to answer, as we can’t observe Bernanke’s thought processes. Yet we can develop hypotheses based on research by social psychologists, who study group decisionmaking. Based on this research, Section VII suggests two factors that may help explain Bernanke’s behavior. The first possible factor is “groupthink” at the FOMC, a tendency of Committee members to accept a perceived majority view rather than raise alternatives that might be unpopular. The second is Ben Bernanke’s personality, which is typically described as “quiet,” “modest,” and “shy”– traits that might make him unlikely to question others’ views.

Section VIII considers other possible reasons that Bernanke’s policies as Fed chair differ from those he advocated until 2003. One, mentioned earlier, is political pressure from inflation hawks. Another, which Bernanke himself has cited, is the absence of deflation in the United States. Both of these factors may influence the Fed, but I argue they are not central for explaining Bernanke’s changing views about the zero bound.

So what possible impact on mon policy?

If this interpretation of history is correct, it has implications for the design of monetary-policy committees. A committee is likely to explore a greater range of options if the causes of groupthink are avoided, as Sibert suggests. Ironically, as Fed Chair, Ben Bernanke has moved the FOMC in that direction. Bernanke does not dominate policy discussions as Alan Greenspan did. He has reduced the emphasis on consensus, tolerating three dissents from FOMC votes. He has also reduced the Committee’s insularity, for example, with news conferences in which he explains policy decisions. The history described here also has implications for the choice of people to serve on policy committees. It suggests that decisions are influenced not only by policymakers’ expertise and opinions, but also by their personalities. Outspoken “bulldogs” may be more likely than shy people to contribute new ideas to policy debates.

Hmm… Get in people like Scott Sumner etc…

Amazing paper. Looks in detail at how Bernanke’s views on this policy have evolved and suddenly changed over time. For instance, in his 2000 paper he mentions 4 broad measures:

  • Depreciation
  • Higher inflation
  • Targeting long term rates
  • Money Financed Tax cuts

Out of these four, he has not used any in the 2007-09 crisis. His views on depreciation changed siginificantly:

Bernanke’s “Paralysis” paper in 2000 advocates “aggressive depreciation of the yen,” but his 2002 speech on preventing deflation rejects depreciation as a policy tool for the Fed. Bernanke notes that the Fed could influence the exchange rate by purchasing foreign assets. But then he says:

In the United States, the Department of the Treasury , not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

Ball says this shift is stark. As both US and Japan have similar situation:

Yet Bernanke’s shift on exchange-rate policy is stark. His argument that depreciation is unadvisable in the “relatively closed economy” of the United States is at odds with his previous advocacy of depreciation in Japa , an economy with a similar level of openness (as measured by imports or exports as a share of GDP). Most strikingly, Bernanke’s argument that the central bank is not responsible for exchange rates is a point he rejects in his 2000 paper. There, in describing the Bank of Japan’s “stonewalling” on exchange-rate policy, Bernanke writes

The BOJ has argued that it does not have the legal authority to set yen policy… [I]t is true that technically the Ministry of Finance (MOF) retains responsibility for exchange-rate policy. (The same is true for the U.S., by the way, with the Treasury playing the role of MOF. I am not aware that this has been an important constraint on Fed policy.) The obvious solution is for BOJ and MOF to agree that yen depreciation is needed, abstaining from their ongoing turf wars long enough to take action in Japan’s vital interest.

Ball asks what made this shift? It was Bernanke appointed as Fed Governor:

Why does Bernanke (2002) disagree with Bernanke (2000) on exchange rates? The natural answer is his appointment as a Fed Governor, which occurred in between the two pieces. Fed policymakers have long deferred to the Treasury on exchange-rate policy, believing that conflicting signals from U.S. officials could destabilize financial markets. In his 2002 Humphrey-Hawkins testimony, Alan Greenspan reminded Congress: “As you know, the Secretary of the Treasury speaks  for our government on exchange-rate policy.” In 2000, Professor Bernanke was “not aware” that the Fed’s influence on exchange rates was constrained by its relationship with the Treasury. Evidently, he became aware once he was a Fed Governor and chose not to oppose the status quo. Again, one reason is that he saw other ways to solve the zero-bound problem.

Hmm.. The reality check of how policies are made vs academics we desire policies to be…

Then someone asks Bernanke a q in 2010 over his crticism of BoJ then and Fed policies now. Bernanke says:

I’m a little bit more sympathetic to central bankers now than I was 10 years


A superb must read paper. What Chairman Bernanke has done vs what Prof Bernanke would have done is something which could have easily changed the history. Going by this paper,  Prof Bernanke would have highly criticised  Chairman Bernanke…

2 Responses to “Prof Bernanke vs Chairman Bernanke: How Bernanke’s views have changed over zero interest rate policy?”

  1. Christy Romer picks books to read on Great Depression… « Mostly Economics Says:

    […] . So there has been a regime shift but is not seen as enough as the inflation target is a low 2%. Prof. Bernanke advocated a higher inflation target when central banks facing ZIRP but as Governor/Chairman realised it is not politically […]

  2. What does earth say to Ben Bernanke? « Mostly Economics Says:

    […] lot has been written over this. It is one of the favorite mon eco […]

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