By pledging to do whatever it takes to return nominal G.D.P. to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth.
Such expectations could increase spending and growth today: Consumers who are more certain that they’ll have a job next year would be less hesitant to spend, and companies that believe sales will be rising would be more likely to invest.
Another possible effect is a temporary climb in inflation expectations. Ordinarily, this would be undesirable. But in the current situation, where nominal interest rates are constrained because they can’t go below zero, a small increase in expected inflation could be helpful. It would lower real borrowing costs, and encourage spending on big-ticket items like cars, homes and business equipment.
Christina D. Romer, “Dear Ben: It’s Time for Your Volcker Moment“, New York Times, 30 October 2011.
Christina D. Romer teaches economics at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.
Scott Sumner is jumping with joy.