The US Federal Reserve’s forward guidance is both imperfect and vague and may lead to bad policy decisions if its growth forecast turns out to be inaccurate, Nobel laureate Lars Peter Hansen said yesterday at a forum in Taipei.
Hansen, one of the three winners of last year’s Nobel Prize in Economics, made the statement during a keynote address titled “The Consequences of Uncertainty” at a forum in memory of Chiang Shuo-chieh (蔣碩傑), the founder and first chairman of the Chung-Hua Institution for Economic Research (CIER, 中華經濟研究院).
Global markets and policymakers pay close attention to the Fed’s reports as peers in other countries tend to take cues from the US central bank.
“Complicated problems may be best addressed with simple solutions, given the limit to the understanding” on the part of policymakers, Hansen said.
The University of Chicago economist urged policymakers to factor in risks of uncertainty when formulating policies because all models are imperfect and vague to some degree.
The Fed recently said that it would not end its monetary easing policy until the US economy shows more recovery.
Overoptimism about the economy may run the risks of premature interest rate hikes that may hurt economic growth, Hansen said, adding that hiking interest rates too fast is another risk.
Policymaking requires more than settling on the right growth models because none are perfect, and policymakers need to decide how much confidence they want to place on the models, Hansen said.
Global central banks have cut their interest rates to near zero, limiting room for further monetary easing, or people may not want cash anymore, he said.
No policy can satisfy everyone and policymakers had better not say just what people like to hear, he said.
Yesterday’s forum was organized by the Chinese-language Economic Daily News, CIER and the Taipei branch of the China Construction Bank (中國建設銀行) in honor of Chiang, a renowned authority on macroeconomics, monetary theory and international finance who is considered to be the principal architect of Taiwan’s economic miracle.
Chiang died in 1993. He was Hansen’s father-in-law.
Hansen is co-principal investigator on a research initiative with the Macro Financial Modeling Group that works to develop macroeconomic models with enhanced linkages to financial markets. The project aims to provide better policy tools for monitoring the so-called systemic risks to the economy.
Additional reporting by CNA
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