In a widely praised speech, Christina Romer referred to the “regime change” at the Central Bank of Japan as, “one of the most exciting developments in monetary policymaking since the 1930s.”
She compares recent Japanese policy favorably to recent Fed policy, saying that based on the lesson of 1933, a regime change that raises inflation expectations is needed to break out of the zero-bound / liquidity trap.
Could a Japanese style regime change happen in the USA? Should it?
It’s important to note (as Romer does), that the change in Japan was political and electoral. Shinzo Abe ran on a platform of getting Japan growing and getting out of deflation. He threatened the Bank of Japan. The Head of the Bank ultimately resigned and Abe got his guy, Kuroda, in there with an aggressively expansionary policy brief.
So the answer to could this happen in the USA I think is no. Can you imagine the reaction if a Presidential candidate threatened the Fed Chair (phone call for Rick Perry)? Can you imagine the reaction if Presidential pressure forced Bernanke to resign? Can you imagine the Senate confirmation hearings on Paul Krugman’s candidacy for Fed Chair? Can you imagine what the FOMC meetings and votes would be like when Richard Fisher and Charles Plosser butted heads with Chairman Krugman?
We don’t have a parliamentary system of government, we do have a now quite strong norm of no overt, heavy handed political pressure on the Fed, and the Fed chair is not a monetary policy dictator. In principle, the Chair has one vote on a 12 person voting committee.
Now the question of should this happen in the USA is trickier.
On the affirmative side, we still have a big output gap, an unacceptably high unemployment rate, too few people in the labor force, and some theoretical evidence that the “expectations channel” could work.
On the negative side, there isn’t much empirical evidence that such a regime change actually will work. The jury hasn’t even been selected yet in the Japanese case, so we have one case, the US in 1933, which is not uncontroversial. I mean, the US economy was in terrible shape well after 1933. Unemployment in 1938 was 19% (yes I know about the “mistake of 1937”and all but the point is that the monetary regime change was not decisive in sustainably fixing the US economy).
Roosevelt took us off gold. That was bold. What would be a comparable present day analog? What if we adopted the Venezuelan Strong Bolivar as our currency. That might work!
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