Bernanke’s Paradox: Can He Reconcile His Position on the Federal Budget with His Recent Charge to Prevent Deflation?

Pavlina Tcherneva

Economics Working Paper Archive from Levy Economics Institute

Abstract: This paper examines Federal Reserve Chairman Ben Bernanke’s recipe for deflation fighting and the specific policy actions he took in the aftermath of the 2008 financial crisis. Both in his academic and in his policy work, Bernanke has made the case that monetary policy is able to stem deflationary forces largely because of its "fiscal components," and that governments like those in the United States or Japan face no constraints in financing these fiscal components. On the other hand, he has recently expressed strong concerns about the size of the federal budget deficit, calling for its reversal in the name of financial sustainability. The paper argues that these positions are fundamentally at odds with each other, and resolves the paradox by arguing on theoretical and technical grounds that there are no fundamental differences in financing conventional government spending programs and what Bernanke considers to be the fiscal components of monetary policy.

Keywords: Bernanke; Deflation; Monetary Policy; Crowding Out; Financial Sustainability (search for similar items in EconPapers)
JEL-codes: E31 E42 E58 E63 E65 (search for similar items in EconPapers)
Date: 2010-11
New Economics Papers: this item is included in nep-cba, nep-hpe, nep-mac, nep-mon and nep-pke
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Bernanke's paradox: can he reconcile his position on the federal budget with his recent charge to prevent deflation? (2011)
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