PARTICIPANTS
John Cochrane, Michael Boskin, Darrell Duffie, Eric Hanushek, Dan Kessler, Pete Klenow, Stephen Langlois, Ron McKinnon, Monika Piazzesi, John Powers, John Raisian, Jonathan Rodden, John Shoven, John Taylor, Jon Willis, Ian Wright
ISSUES DISCUSSED
John Cochrane discussed some of his work on monetary policy and financial markets, including what the role of the Federal Reserve has historically been and how its role has been evolving.
Cochrane began by explaining that once in a generation “central bank doctrine,” or the basic concept of what a central bank is and does (or should do), undergoes a dramatic shift and that such a shift is currently underway in the United States. He then overviewed the role of the Federal Reserve historically and different shifts in the “central bank doctrine,” including the most recent era, which was characterized by a dual role of the central bank with regard to monetary policy and bank supervision. In particular, its role in monetary policy included controlling the federal funds rate, open market operations, a responsibility to stabilize the price level, and political independence in exchange for limited powers, while its role in bank supervision included acting as a lender of last resort, clearing checks and overseeing various activities.
Following this, Cochrane discussed the role the Federal Reserve has been taking more recently (since 2007), including three particular observations and related issues about its new direction. The observations were: (1) that the Fed has used many unconventional policies and tools in combating the financial crisis that may now be regarded as part of its toolbox, (2) the Fed has become a large financial regulator first and foremost amongst its roles, and (3) the perceived effectiveness of conventional monetary policy is diminishing.
Related to these observations, Cochrane then concluded by posing the questions to the group of whether the Fed should (1) be allowed to use such unconventional policy, (2) have such political independence and insulation and (3) if the Federal Reserve should be structured differently institutionally.
