PERSPECTIVES ON BALANCE SHEET AND CREDIT POLICIES: A TRIBUTE TO MARVIN GOODFRIEND.

• Author: George, Esther L.

I appreciate this opportunity to pay tribute to Marvin Goodfriend and his many contributions to the theory and practice of monetary policy. At the Kansas City Fed, we knew Marvin as a scholar and a good Federal Reserve colleague. Marvin also was a participant in a number of our Jackson Hole Economic Symposiums. As a Research Officer at the Richmond Fed, he attended the first symposium that we held in Jackson Hole, Wyoming, in 1982, where his work on "Discount Window Borrowing, Monetary Control, and the Post-October 6, 1979 Federal Reserve Operating Procedure" was widely cited. (1) Thirty-four years later in 2016, as a professor at Carnegie Mellon, he presented a paper making the case for deeply negative interest rates as a policy tool that could breach the zero lower bound on nominal rates. He argued that "the zero interest bound encumbrance on monetary policy should be removed so that movements in the intertemporal terms of trade can be reflected fully in interest rate policy to sustain price stability and full employment with a minimum of inefficient and costly alternative policies" (Goodfriend 2016; 128; emphasis added).

Balance Sheet Policy, Credit Allocation, and Negative Interest Rates

Willing to challenge conventional views, Marvin expressed concern that "central banks [would] be tempted to rely even more heavily on balance sheet policy in lieu of interest rate policy, in effect exerting stimulus by fiscal policy means via distortionary credit allocation, the assumption of credit risk and maturity transformation, all taking risks on behalf of taxpayers and all moving central banks ever closer to destructive inflationary finance." He understood the associated heartburn of this view, acknowledging that negative interest rates was an idea that would likely require "some getting used to." He noted, however, that the public also was initially resistant to leaving the gold standard, and later to floating the exchange rate, but gradually accepted these changes.

While the use of negative interest rates gives me pause as a way to address a future encounter with the effective lower bound, I share Marvin's concerns about the potential side effects of balance sheet policies that pose risks to financial stability and threaten the central bank's policy independence.

As a voting member of the Federal Open Market Committee (FOMC) in 2013, I expressed my concerns about the continuation of the asset purchase program known popularly as QE3. By then, financial markets were stable and the economy was growing. These concerns about the expansion of the Fed's balance sheet under those conditions echoed many of Marvin's concerns. In my view, the possible...