Bloomberg News

Fed’s Plosser Says Economists Should Design Crisis Lending Rules

May 25, 2012

Philadelphia Federal Reserve Bank President Charles Plosser said central bankers should consider how to design rules guiding their emergency lending during crises.

“Monetary theory has given a great deal of thought to rules and credibility in the design of monetary policy, but the recent crisis suggests that we need to think more about the design of lender-of-last-resort policy,” Plosser said in prepared remarks for a speech today in Eltville, Germany.

Plosser has advocated that the Fed and other central banks make interest rate decisions based on a rule, increase transparency and demonstrate to markets how policy would respond to changes in the economy.

Plosser didn’t provide today his outlook for the economy or monetary policy. Instead, he outlined topics for economic research, such as incorporating the institutional design of central banks and moral hazard into macroeconomic models.

Plosser, 63, became Philadelphia Fed President in 2006 following a career in academia. He was formerly dean of the University of Rochester’s graduate school of business and co- editor of the Journal of Monetary Economics.

While arguing for the importance of rules, Plosser said that from his experience as a central banker he believes they’re not flawless.

“From a policy perspective, the assumption that a central bank can always and everywhere credibly commit to its policy rule is, I believe, also questionable,” Plosser said at a conference sponsored by Germany’s Bundesbank and the Philadelphia Fed.

“In practice, I seek ways to make policy more systematic and more credible,” Plosser said. Still, “commitment is a luxury few central bankers ever actually have, and fewer still faithfully follow.”

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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