In a comment on this post, Mark Thoma pointed out that Janet Yellen’s views have changed since 2005. In this piece from 2009, she says
the hand we have been dealt today doesn’t look anything like the textbook ideal that I just described. Instead, we are experiencing pervasive financial market failures with devastating macroeconomic effects. The normal monetary transmission mechanism has been hobbled by dysfunctional money and credit markets. Risk spreads have ballooned on supposedly safe assets like agency debt and mortgage-backed securities (MBS). What does optimal monetary policy look like in this situation? How do we gauge the effectiveness of policy actions, and how can we implement and communicate systematic policy responses under these conditions?
What strikes me is that Yellen’s views in 2005, that I cited in the earlier post, closely reflected the consensus point of view at that time. And the 2009 speech closely reflects the consensus view at that time.
Today, the problem for the 2009 consensus view is that financial markets recovered really well by the Spring of 2009, but the labor market, particularly as measured by the civilian employment/population ratio, has failed to recover. So now, macroeconomists are struggling to explain how a financial crisis five years ago could still be causing high unemployment today. (Of course, Reinhardt and Rogoff warned that the recovery would be slow, but other economists have challenged their view that financial crises produce slow recoveries.) Do we think that the new consensus will be “secular stagnation” and that Janet Yellen will once again join it?
She misspelled “nonmarket failures”.
Macro always has a potential problem with looking too much at the convenient numeric data while ignoring major relevant events.
In the last few years, American economic policy has not been as good as it was historically. In particular, the employer mandate seems problematic with regards to employment. If you ignore such policies, then I would think you have trouble understanding how the larger economy is going. It would be like analyzing the economy in the early 40s, but failing to consider World War II.