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New Fed Board hawk a “reverse-causation” champion

The two probable Federal Reserve Board nominees whose names surfaced late last week should on balance bring a hawkish view on inflation to contest the mainstream (neoclassical) Keynesian stance of Chair Janet Yellen on macro policy. They can be expected to seek a higher trajectory for U.S. short-term and long-term rates.

In particular, Marvin Goodfriend, one of the pair whose names came up this past week, is a longtime regional Fed president at the regional bank in Richmond and is associated with a “new neoclassical synthesis” view that is anti-Keynesian and conservative on the inflation front. In other words, he will seek to stop upside growth risks relatively quickly.

Less widely observed is the fact that Goodfriend has been influenced by real business cycle theory and in contrast for example to Ben Bernanke, the New Keynesian, has argued in his academic work that nonmonetary forces play a large role in the dynamics of business cycle variables—prices, GDP growth, and the like. Hence, he is by no means a monetarist, in spite of his hawkish views on inflation and the need for policy tightening.

As I noted in my dissertation, in the late 1990s, Goodfriend sought to explain money-income correlations using a reverse-causality argument that should not be mistaken for Keynesian or post-Keynesian arguments to the same effect, which rest on a very different set of theories and arguments. It is somewhat notable that this central banker with very non-Keynesian views believed that the empirical evidence spoke in favor of reverse causality, i.e., that macroeconomic variables drive the stock of money, rather than vice-versa.


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