Is Janet Yellen America’s Keynesian Dove?

By: Ben Proos

Now that Janet Yellen has begun her tenure as chairwoman of the Federal Reserve Bank (FED), it isn’t just her additional X chromosome that incites discussion. Rather, debate centres on the widely differing philosophies between Yellen and former chair Ben Bernanke, a discrepancy that reflects what is perhaps the most glorified debate in macroeconomics.     

At her first congressional testimony in her new position, Yellen was labelled a Keynesian, that is, one who views monetary policy as just another instrument, albeit a very important one, for ensuring high growth rates, low unemployment, equitable income distribution and moderate inflation. Yellen recognises the ubiquity of conflicting policy objectives. Following the Keynesian, or dovish, line of reasoning she believes that the FED should seek reconciliation between these various policy objectives, unlike monetarists, who maintain a “hawk’s eye” on inflation. It follows that when an economic variable deviates from its intended path, policy should focus attention on that particular issue, whether it be unemployment, growth, or inflation.

The once-revered Keynesian school of thought has not recently had a position in the kernel of a central bank. The Reagan-Thatcher axis of the 1980s saw the birth of Milton Friedman’s monetarism, an economic doctrine that labours the relevance of money supply in determining output and price levels. Despite Bernanke’s bout with Quantitative Easing (QE), he is philosophically a monetarist, as have been most recent central bankers including Mervyn King and Alan Greenspan. However, the appointments of Mark Carney and Janet Yellen represent a departure from the austere nature of monetarism.

Yellen’s academic work paints her as an apostle of Keynes. In a 1984 paper co-authored by Nobel Laureate (and husband) George Akerlof, she developed the “efficiency wage theory,” positing that wages will often be paid above the market clearing level by employers in order to boost productivity and ultimately profits. Their 2004 article, “Stabilization Policy: A Reconsideration,” critiqued Robert Lucas’ scepticism about traditional counter-cyclical Keynesian fiscal stimulus programmes to correct business cycle fluctuations. Yellen’s behaviour and approach at the FED will likely close follow the arguments outlined in these significant works.

Central banking around the world is undergoing a profound intellectual revolution. The inability of traditional neoclassical models to diagnosis the 2008 economic crisis and correctly prescribe remedies has led to bouts of unorthodox policy such as QE. Janet Yellen symbolises a ”phoenix from the ashes,“ and the Renaissance of Keynes. Gone are the halcyon days of overindulgent mathematics to solve inflation quandaries, and reintroduced from obscurity is the pragmatic approach of the Keynesians. In the UK, Mark Carney’s Keynesian stance has sent positive signals throughout the financial system and the economy as a whole. Janet Yellen’s tenure at the FED can likewise re-rationalise macroeconomics and secure “The Return of The Master.”

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