If Operation Twist is just a matter of selling short or medium-term bonds and buying long-term bonds, so that the amount of bank reserves (and any of the money which actually gets into circulation) remains the same, then it should have little or no effect on inflation or inflation potential, if inflation is affected by the quantity of money (as assumed in various theories). The idea is apparently to fine-tune the yield curve, not increase the money supply or lower interest rates en masse. But given that long-term rates are lower than they have been in over 60 years, it is not likely to be possible to get those rates much lower, or that it would have much effect on businessmen, who are deterred from investment by poor demand, not excessively high interest rates. The fact is that the Fed can't do much at this point - Operation Twist is probably a public-relations move (see my comments on Dean's post yesterday)

The fact is that the Fed can't do much at this point - Operation Twist is probably a public-relations move (see my comments on Dean's post yesterday)

There is a lot the Federal Reserve could do. Monetary policy is about expectations. If the Fed were to credibly commit to a higher period of inflation, this could lower real interest rates, spuring business investment, as well as speed up the consumer debt reduction process, as Dean notes.

The problem, however, is that the Fed is managing expectations poorly. It has commited to a "wait-and-see" approach in all of its moves since the recession ended. The recent move to extend Operation Twist, while claiming that the Fed stands ready to ease policy further should conditions deteriorate, is not a break from the Fed's recent policy trend, which hasn't helped the economy all that much.

An increase in the inflation target could only cause an actual increase in inflation if the factor limiting investment (or spending) at the moment is the threat that the Fed will take action in the future against inflation. This is in the first place highly implausible, as implying a complex chain of causation based on expected actions and their consequences. In the second place all empirical data indicate that inflation expectations are based on actual current and past inflation, not some claims by the Fed about what it will or will not do in the future. Third, Krugman, Baker and others who place such importance on raising the inflation target are themselves in the habit of asserting that demand is the critical factor when arguing against claims that interest rates and regulation are important.

It seems to me very odd that so many liberal economists appeal to what I call the "monetary-credibility fairy", when they are so disdainful of the fairies and monsters which conservatives appeal to. The emphasis should be on fiscal policy, which is not about "managing expectations" it is about putting real money into the economy.

Higher inflation would be good if you enjoy reducing the value of retirement savings of seniors, and diminishing the effective income of seniors who live in the income of their retirement savings, and reducing the lifestyle of low wage workers whose wages don't increase with inflation despite your theories that they do.

"Lowering the effective interest rate" is fairly meaningless to a homeowner whose house payment stays the same while the cost of food, gas, heating oil and clothing all increase by more than his wages do. That "lower effective interest rate" is a nice ivory tower theory that does not lower his house payment one dollar.

I should have said "arguing against claims that tax rates are important", not interest rates.

As the Fed began trying to expand the money supply, and succeeded in packing bank reserves with billions, many important people stridently predicted that inflation would explode. These mostly conservative people must be influential, since they apparently dominate most national economic policy. Yet inflation has not exploded - why haven't all those seemingly weighty predictions resulted in inflation? If the economy does not listen to all those people, why would it listen to Ben Bernanke, who is denigrated or vilified on both the left and right (for very different reasons)? If Bernanke is considered to have broken the promises he made before joining the Fed, why would any promises he makes now be believed? Monetary credibility is a fairy tale.

If I'm reading skeptonomist correctly, I'm in agreement: all this stuff about helping the economy via expectations, targetting nominal GDP, etc, is a nice story and isn't completely impossible, but it does seem rather doubtful.

If I'm reading skeptonomist correctly, I'm in agreement: all this stuff about helping the economy via expectations, targetting nominal GDP, etc, is a nice story and isn't completely impossible, but it does seem rather doubtful.

I agree to an extent, and I've been vocal in trying to stem the whole NGDPLT=panacea hype that has gone viral in the blogosphere. But my 2c is that it's still worth a shot to have the Fed attempt to commit to a higher inflation rate to speed up the recovery. What's the potential cost? A repeat of the 1970s? Many would argue that the current environment is much worse than what occured in the 1970s.

Keynesian policy is about doing whatever it takes to bring growth back. This not only includes fiscal stimulus, but also monetary stimulus. An exchange rate depreciation would be great, too. The point is, the Fed may indeed be out of ammo, but I'd like to test that hypothesis first before admitting defeat.

http://en.wikipedia.org/wiki/P...my_of_good

I've been reading news accounts of Bernanke calling for more fiscal help for 3 years now. And yet STILL people argue that more monetary probably won't work. What about the millions of long term unemployed? Just forget about them huh?

If Bernanke's tries it and it doesn't work fine. Until then all of these counter arguments are silly.

1950-1970, 2% average, 1968 had highest equality
1970-2006, 4% average, huge increase in inequalityu
Marx hated fiat currency...note when growth slows, and Bernanke hints at accomodation, what happens...THE STOCK MARKET RALLIES....duh! who benefits from inflation? Those best able to manuever around it. The poor have no debt, do not benefit. The middle class, some debt, some benefit....the 1%, huge leverage, many systems to avoid the pain of inflation. This notion that inflation help anyone but the wealthy is weird, especially coming from a union activist like Dr. Baker...history shows the unions were co-opted by Keynesianism at some point in the mid 20th century...and the result has been obviously disastrous...the decline of unions coincides with the end of Bretton Woods.

JSeydl wrote,

But my 2c is that it's still worth a shot to have the Fed attempt to commit to a higher inflation rate to speed up the recovery.

It's probably worth a shot, yes.