Panel 2: Fed Policy and the Misallocation of Credit Natural Rates of Interest and Sustainable Growth

The evolution of macroeconomic theory and monetary policy has brought us to a point that calls for critical reflection. It is undoubtedly true that no newcomer to the field can even begin to understand the current state of macroeconomics and policy formulation without understanding just how, dating from the pre-Keynesian era, the profession has arrived at this state. High theory today takes the form of stochastic dynamic general equilibrium analysis, while policy discussion, which concerns itself with economy-wide disequilibrium, centers on the effectiveness—or ineffectiveness—of old-style fiscal and monetary stimulants. The market is a process and so too is the theorizing about it. The history of macroeconomic thought reasserts its relevance at times of economic crises and almost inevitably leads us to the question, " How far back do we have to go to start all over? " A plausible answer is that we have to go back to 1912 and the publication of Ludwig von Mises' Theory of Money and Credit (Mises, [1912] 1953). The year itself has significance as the immediate predawn of the Federal Reserve System, while Mises's title reflects both the theme of the conference and the particular focus of this panel. In the modern era of interest-rate targeting (dating from the early 1980s), the Federal Reserve's concern about the misallocation of credit has been largely overshadowed by its near-exclusive attention to unemployment and inflation. Lip service to the goal of a long-run sustainable growth rate has been just that. If interest rates are manipulated with an eye to their short-and medium-run impact on the unemployment rate and their long-run effect on the rate of inflation, they cannot at the same time be expected to steer the economy along a sustainable growth path. The sustainability that the Federal Reserve has actually achieved is strictly (and perversely) an inter-crises sustainability. For all too long, the Fed has acted to extend its own policy-induced booms, forestalling market corrections and