by Calculated Risk on 10/16/2010 12:12:00 PM

From Boston Fed President Eric Rosengren: Revisiting Monetary Policy in a Low Inflation Environment. Rosengren reviewed the Japanese experience and the 1999 Boston Fed conference on monetary policy in a low inflation environment. He noted:

From a policy perspective I take several lessons from the Japanese experience. First, should deflation occur, it can be quite difficult to overcome. Second, insuring against the risk of deflation may be much cheaper than waiting until it has occurred and then trying to address it. Finally, financially fragile economies may be particularly vulnerable to negative impacts from premature austerity measures.

He also said

[A] policy of gradually adjusting monetary and fiscal policy, as conducted in Japan after deflation first occurred, may not be as effective as an active policy response taken before deflation has become embedded in the economy. Of course, it should depend on the given situation and incoming data.

Also of interest, Rosengren discussed the policy channels of the Fed's Large Scale Asset Purchase or “LSAP” program. In his view there were several channels:

LSAP Channels

LSAP can successfully reduce long-term rates

Cross-correlation of assets implies other rates will fall

Does signal intent to keep rates low –medium term Treasuries did move

Exchange rate channel may be important

Lending channel –firms with access to markets leave banks, providing more capacity for banks to focus

Rosengren is current on the FOMC.