WASHINGTON — The price path "signature" indicates U.S. monetary policy is "optimal," as it has returned prices to a path close to that seen in the mid-1990s, St. Louis Federal Reserve Bank President James Bullard said Thursday night.
In a presentation entitled "Price Level Targeting: The Fed Has It About Right," Bullard noted that nominal GDP would seem to suggest policy is too tight but should be adjusted to account for the historic post-crisis slowing of the pace of growth.
"Nominal GDP targeting, without proper adjustment, could be a policy disaster," Bullard said in a slide in his presentation to the Economic Club of Memphis.
"Nominal GDP, the combination of the aggregate price level and real GDP, is about on target if properly adjusted for the Reinhart-Rogoff effect," he said, citing the authors of a study on the history of financial crises show economic growth is slower after a crisis.
Bullard said the U.S. economy seems to have responded just as it should have if monetary policy reacted in just the right way to the enormous shock of the financial crisis.
"The FOMC has in fact essentially behaved as if it was price level targeting. In this sense, policy since 2008 looks close to optimal," he said, calling this "a singular achievement of recent monetary policy."
He noted that simple versions of a leading macroeconomic theory suggest the price level path can provide a "signature" for optimal monetary policy, if it returns to its previous path.
"The U.S. experience seems to satisfy this signature test, because the actual aggregate price level in the U.S. is quite close to the path established beginning in the mid-1990s," Bullard said.
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