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Why this Fed official believes the central bank should rethink everything

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Are the Federal Reserve's efforts to resuscitate the economy aiming at the wrong target?

That's the argument from St. Louis Fed President James Bullard in a working paper released Thursday afternoon. In the wake of the financial crisis, the central bank pumped trillions of dollars into the economy and promised to keep its benchmark interest rate at zero in hopes of boosting the recovery. The goal was to send the economy into high gear, and many top officials predicted just that would happen.

But Bullard says it hasn't.

“The fact that this core prediction has not materialized is causing a rethink of monetary policy at the zero lower bound," Bullard said in a conference call Thursday. "This paper is trying to contribute to this burgeoning literature.”

Bullard proposed that, to accomplish its goals, the Fed should set a target for how fast the economy should grow, a policy known as nominal gross domestic product targeting. That means when disaster strikes, the central bank would seek to boost inflation and hopefully keep rates from hitting zero in the first place. And when times are good, the Fed would try to lower inflation to help make up for higher rates during the rough patches.

The paper is purely hypothetical: In Bullard's model, the central bank can perfectly control inflation at all times, though in practice the Fed has found reaching its goals frustratingly elusive.

Prominent economists have supported the concept of targeting nominal GDP, including Michael Woodford of Columbia University and Christina Romer of the University of California-Berkeley and President Obama's former economic adviser. Bullard's paper indicates it now has at least one proponent within the central bank.

“This is very much an academic exercise," Bullard said. But, he added, “we have been at the zero lower bound for a long time now, and it’s questionable what effects we’re getting from that.”

Bullard's co-authors are Costas Azariadis of Washington University and the St. Louis Fed, Aarti Singh of the University of Sydney and Jacek Suda of the Narodowy Bank Polski.