The 'Woodford Period': A Bourbon for Bernanke?

The news release summarizing  St. Louis Fed President's James Bullard's recent speech on the "current stance of monetary policy" includes the following:

He stated that “the current St. Louis Fed forecast for the unemployment rate implies that the 6.5 percent threshold will be crossed in June 2014.” However, he noted, the policy rate implied jointly by the Taylor (1999) rule and the St. Louis Fed forecasts should increase in August 2013.  Thus, “The Committee’s thresholds imply a ‘Woodford period’ since the policy rate would be held at zero past the point where ordinary FOMC behavior would indicate an increase,” Bullard said.   

William McChesney Martin, who chaired the Fed in the 1950's and 60's once said it was the Fed's job "to take the punch bowl away just as the party gets going."  It sounds like the Fed's new corollary to Martin's rule involves leisurely sipping bourbon for a while when the economic slump is ending.  If the slump is the hangover from a financial crisis, maybe its kind of a "hair of the (monetary) dog" thing.

The release continues:

The period from August 2013 to June 2014 would be the “Woodford period,” which refers to Michael Woodford of Columbia University.  “According to received theory, this is a more stimulative monetary policy and possibly even an optimal monetary policy when the zero lower bound is constraining,” Bullard added.  

Oh, "Woodford" is the author of Interest and Prices, not Woodford Reserve bourbon whiskey.

Perhaps that's for the best... if distilleries expected the Fed to print money to buy bourbon we might expect to see them them start diluting it in anticipation.  Hmmm...

Stanley Fischer

At Wonkblog, an interesting profile of Stanley Fischer by Dylan Matthews, which mixes in a little recent history of economic thought, recounted with the help of one of Fischer's advisees at MIT:

“He was not fundamentally a rat-exian,” Bernanke said, invoking the derogatory slang that Keynesians used to describe Lucas and his theory of “rational expectations.” “He was basically a Keynesian in his instincts, so he got along just fine with Samuelson and [fellow MIT professor Robert] Solow.”

The fruit of Fischer’s effort to integrate the two approaches is known today as “New Keynesian” economics. It is the dominant approach in most leading economics departments, with Mankiw, Bernanke, IMF chief economist Olivier Blanchard and many others contributing to the movement.

But Fischer was arguably first out of the gate. He helped originate the argument that “sticky prices”— that is, practical impediments to changing prices for goods, such as the expense of printing a new restauarant menu — mean that even rational, self-interested businesses and consumers can make choices that add up to an economy much like the one Keynesians describe.

Fischer, Bernanke said, wrote “one of the very first papers that had both sticky prices and rational expectations in it.” By doing this, Fischer had in effect united the two sides of economics. “I still think Keynesian economics is extremely important, and if anybody didn’t think so, this crisis should have made them rethink,” Fischer said in an interview.

The profile includes some speculation that Fischer might succeed his student as Federal Reserve chair (Bernanke's term ends in Jan. 2014).  If he were nominated, it would be interesting to see whether the fact that he is from outside the US - he was born in Zambia (when it was Northern Rhodesia) and came to the US for grad school at Chicago - and served as head of another country's (Israel's) central bank would cause trouble during the Senate confirmation process.  It seems likely that some in the Senate would make trouble for whoever President Obama might nominate (which may be an argument for trying to keep Bernanke on), but I would guess opponents would be more likely to latch on to the fact that Fischer also held a high-ranking job at Citigroup for several years.

Update (2/17): David Warsh's Economic Principals also discussed Fischer as a potential Fed candidate a couple of weeks ago.