Ben Bernanke, economist

by on October 24, 2005 at 1:02 pm in Economics | Permalink

I associate Ben Bernanke with several major contributions:

1. The theory of irreversible investment, circa 1983.  Before Bernanke, Dixit, and Pindyck, models often assumed that investments could be reversed or "taken back."  Bernanke outlined how the irreversibility of investment might matter.  Often individuals will choose to wait and sample more information, rather than make an immediate decision.  Small changes in information could lead to big fluctuations in investment.  Large changes in interest rates might have little effect.  Bad news can hurt you more than good news helps you.  This was Bernanke’s first major contribution to economics.

2. The credit channel for monetary policy; here are the papers, most of all the 1992 piece with Alan Blinder.  Bernanke took an old Keynesian idea and gave it empirical rigor.  During upturns and downturns, does money or credit play the leading role?  Bernanke showed that credit has greater importance.  Bernanke’s work in particular helped combat the Litterman and Weiss paper of 1983; L&W had showed that once you put the nominal interest rate in a Vector Autoregression (a relatively atheoretical statistic technique), money didn’t seem to matter.  Bernanke rescued the relevance of money but showed it mattered through the associated channel of credit.  This work stands among the most important contributions in macroeconomics in the last twenty years.  It also suggests that Bernanke, as Fed chair, will look closely at credit indicators.  Here is a Bernanke speech on money and the stock market.

3. Inflation targeting. Very few if any economists will now defend the old Friedmanesque recipe of monetary targeting or a fixed rule for money supply growth.  It has become increasingly popular to look toward inflation targeting.  New Zealand and Canada led the way in terms of policy when their central banks explicitly adopted a range for inflation targeting; 0-2 percent in the case of New Zealand.  Bernanke would like to see the Fed put greater emphasis on price stability.  He did not invent this view, but he is the individual who made it politically credible.  Right now the major debate in the theory of monetary policy concerns whether inflation targeting should be tight or loose.  Bernanke has been a major force on these issues, and he has often been praised for his leadership in this area, even by those who disagree with him.  Here is a 1999 Bernanke essay on inflation targeting.

4. Causes of the Great Depression; here is one paper, here is part of his book.  Bernanke did a good deal of comparative work and concluded that the Great Depression became great because of deflation, its international transmission, and rigid exchange rate policies.  Recall that Sweden, which cut the link from gold and let its currency float, had a much milder depression during the 1930s.  This has become part of accepted wisdom; in a policy context it implies Bernanke has a low tolerance for deflation.  Here is a Bernanke speech on the Great Depression.  Here is an Anna Schwartz review of his book.

5. The global savings glut.  Trade and budget deficits are enormous, so why aren’t we collapsing?  Why do real interest rates remain so low?  Bernanke cited the possibility of a global savings glut; here is one explanation of the idea, here is another.  The bottom line is this: some Asian countries have high levels of savings, but poor financial institutions.  They invest their savings in the United States, and often we invest in back in Asia.  In essence they are "outsourcing" their savings to foreign financial institutions.  This recycling of Asian savings may help explain what is going on in the global economy.  It also suggests that the current U.S. position is at least temporarily sustainable.  Here is a relevant Bernanke speech; here is some commentary on the idea.

Here is Bernanke’s vita.  Here are his books.  Here is his talk on making the transition from academic life to the policy world.  Here is a White House bio.  Here is Wikipedia.

Bernanke the man? I met him once and had lunch.  He came across as a nice guy; most importantly, he listened to everyone at the table (or at least seemed to!), no matter what their academic status.  In the profession he is popular.

If you know more, comments are open.  Here are various blogger reactions.

1 Chris Monnier October 24, 2005 at 2:32 pm

So would he be considered a libertarian, at least economically?

2 save_the_rustbelt October 24, 2005 at 3:17 pm

The Wikipedia posting is quite awful, someone deleted everything but an anti-Semitic slur.

Stupid people shouldn’t breed or post to
Wikipedia.

3 Deb October 24, 2005 at 3:26 pm

“Bad news can hurt you more than good news helps you.”

Interesting. The asymmetry is analogous to the concept of “loss aversion” in Kahneman and Tversky’s prospect theory.

4 Chris Monnier October 24, 2005 at 5:24 pm

> Libertarian is a political designation, not an economic one.

Right. So, just out of curiosity, is he known to be libertarian at all? Does he support reducing regulations? Does he favor eliminating subsidies, tariffs, etc.? While these aren’t directly relevant (these are things that ultimately have to go through Congress), they’d still be nice to know.

5 dsquared October 24, 2005 at 5:32 pm

Inflation targeting, surely? Price level targeting would attempt to reverse pinflation shocks, while inflation targeting just aims to not repeat them.

6 Barkley Rosser October 24, 2005 at 5:55 pm

It is not obvious to me that inflation targeting is superior to the
Taylor rule, which Taylor (at one point on the second tier list of
Fed Chair candidates) argued fairly convincingly was what the
Greenspan Fed had actually done, at least before 2000. Of course
Greenspan has long been a total pro-discretion guy, backed by his
own intuitive super data wonkiness. It worked during the crises of
1987, 97, and 98. Will Bernanke be able to replicate that? I guess
this is the issue of the “magic Greenspan touch” that maybe nobody has.

However, I support the appointment. Bernanke is clearly superior
to the other leading candidates in the final stage. Many feared
that it would be Hubbard because he has been more of kowtower to
the administration’s less credible policies. However, the market
polls have clearly favored Bernanke, and after the disastrous
Miers appointment, and all the other pressures coming down, Bush
clearly did not want to have any controversy on this one. Bernanke
should sail through the Senate, possibly with a unanimous vote even.

7 Jake October 24, 2005 at 8:39 pm

GAB

Had same question. Read the “Bernanke essay” above. It spells it all out.

8 Admiral Waugh October 25, 2005 at 3:17 am

I don’t know how I feel about Bush’s continued pattern of elevating people fairly close to him– I mean, it’s not like it’s a pattern for only Bushie– but it just feels so wrong.

Anyway, the guy is genuinely super-qualified, and of course, he wrote all our Macroeconomics textbooks… although I also don’t know how I feel about Wall Street being so exuberant. These guys have short-term written all over them.

9 E.o.t.S November 5, 2005 at 8:31 pm

It seems that the discussion has focused on Bernanke as the optiaml choice becasue of his qualifications — this is very interesting becuase no one stopped to query the veracity of the position he has been given. The real question is why have a Fed Chairman in the first place or even why have a Federal Reserve Board at all? What will Bernanke’s polciies do? Either slow down or speed up the Fed’s totally destructive assault on sound money and the wealth of every American who isn’t plugged into government privilege.

10 john fensterman February 27, 2006 at 1:39 pm

February 27,2006 Good afternoon Mr.Ben bernanke..Congratulations.Wishing yu lots of luck..Unfortunately,I do not belief that you will be able to attack the issue which is the heart
of the U>S>….You may increase the interest rates at the short level,but the long term rates
will not go up..period.In order for the long term rates to move up it needs veins and blood
which will flow to the heart.Since the last feds chief removed the heart from those interest
interest rates,yes the long term,,there is no way the long term rates will move up..Eventually the patiend dies…If you don’t belief me ask a doctor…

11 john fensterman February 27, 2006 at 2:00 pm

February 27,2006 Good afternoon Mr.Ben bernanke..Thank you for reading my last two comment.
Unfortunately my computer is on the train going from new york city to new jersey and do to the
underground system it keeps shutting of every few moments.
I certainly hope that this website master will forward you these comment as I truly belief that
they should bve printed in the new york times and the wall street journal…

12 molly nunziata February 28, 2006 at 1:28 pm

Good afternoon Mr.Ben bernanke February 28,2006.
I certainly hope that any one reads this comment will forward it to Mr.Ben bernanke immediately..
As long as Mr.Ben Bernanke will keep those long term interest rates at these levels or even reduce them by two or three
percent,I will be able to make a fortune of money by reselling my condominium at prices that are skyrocket very high.
I have made a bet with my deares friend that although Mr.Ben bernanke knows about what I and other are doing,He will make sure that those long term interest rates will remain at this level for the next five years…For all those who are reading this comment…Read it a second time and even a third time,And if you don’t believe what I wrote,take a look at the long term interest rates in three month,six month and next year…You will see that I am correct what I wrote..They will remain where they are today February 28,2006….

13 william youngworse March 1, 2006 at 12:01 pm

Hi Joyce Carmelian March 1,2006 11;52am

I just read your wonderful comment on the U.S> economy and the U.s.goal for the next few Years.
I personally must agree with you in its entirety…You are 100% correct when you write that the
new feds chief will do absolutly nothing..You are right when you write that the price of housing will continuwe to go up for the next 5 years..attention Joyce carmelian..Where else can one make a big buck and sleep at night…Only on housing…Let Mr.Ben bernanke talk to the senate all he wants…I do not belief him at all…We all need a roof to cover our heads..Natuarally the price
of house and home will exceed inflation over the next five years..Take a look what has happened
when they lowered interest rates to 1%….The price of housing just continued to go up and up..
and The president and the feds chief really expect you to belief them…Look at the president..
he went on television to say they had weapons of mass destructions..Where???

14 mike June 19, 2006 at 6:58 am
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