Ben Bernanke, economist

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.