In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Sunday, January 14, 2007

Mankiw Confuses Fed Transparency and Oversight with Independence

by Calculated Risk on 1/14/2007 11:55:00 PM

Professor Mankiw reads Greg Ip at the WSJ: Fed Chairman May Face Heat At Hearings

When Federal Reserve Chairman Ben Bernanke testifies on monetary policy next month, he is likely to get far more scrutiny than usual.

By law, the Fed chairman must testify twice a year to Congress: in February and July. Ordinarily, each installment lasts two days, one before the Senate Banking Committee, the other before the House Financial Services Committee. There are no other witnesses.

In a break with that tradition, Barney Frank, the Massachusetts Democrat who took over the House panel this month, said he plans to hold an additional day of hearings in which witnesses, such as economists and labor experts, will give their views on what Mr. Bernanke said.
Mankiw asks:
"After reading a story like this, one might worry that more Congressional scrutiny will translate into less Fed independence and ... worse macroeconomic outcomes."
Mankiw's concern about Fed independence is a false worry. The hearings may provide more heat than light, but, as Fed President William Poole wrote in 2004: FOMC Transparency
It is natural to ask why central banks need to be transparent. One answer is that central banks are governmental agencies and as such are accountable to the public for their actions.
This is called oversight. But Poole also argues that transparency leads to better results:
The roots of central bank transparency are found not only in the principles of democratic accountability but also in economic theory.
Transparency should help markets to make the best possible adjustments over time and minimize uncertainty flowing from monetary policy itself.
Better transparency usually leads to better results, not worse.

Oversight. Transparency. Perhaps these extended hearings will not be especially productive in terms of oversight or transparency, but then they are at worst neutral in terms of macroeconomic outcomes. And these hearings are definitely not an assault on Fed independence.