Further Thoughts on Sen. Marco Rubio and Monetary Policy

by Reihan Salam

In light of our recent discussion of Sen. Marco Rubio (R-FL) and monetary policy, I should note that the senator’s press office released a fact sheet that included the following reference to price stability:

Rubio: “Sound monetary policy would also encourage middle class job creation. The arbitrary way in which interest rates and our currency are treated is yet another cause of unpredictability injected into our economy. The Federal Reserve Board should publish and follow a clear monetary rule – to provide greater stability about prices and what the value of a dollar will be over time.”

 

 

Enact The Federal Reserve Modernization Act.  Introduced in 2012 by U.S. Senator Mike Lee (R-UT), this bill would reforms the nation’s Federal Reserve System by focusing the Fed’s mission on price stability, require better reporting and make the organization more transparent to Americans.

Price stability needn’t mean eliminating inflation. It could mean, for example, a stable path of nominal GDP growth, which would provide greater price stability over the long-run than a more ad hoc approach to monetary policy. 

Some object to Sen. Lee’s proposal on the grounds that it is irresponsible for the Fed to abandon its dual mandate. A number of economists, including Christina Romer, have made the case that the persistence of high unemployment is the central reason for the Fed to engage in more monetary easing. But would a Fed that focuses exclusively on price stability necessarily be disinclined to engage in monetary easing? Adhering to a price-centric target, like targeting a stable path of nominal GDP growth, would also require monetary easing in a depressed economy. If high unemployment persists even in an environment in which NGDP growth is stable, I think it is reasonable to suggest that fiscal policy should come to the fore.