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tv   Former Fed Chairs Yellen Bernanke Others Discuss Inflation - Part 3  CSPAN  November 4, 2019 10:39am-11:36am EST

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necessarily doing stuff. the fed is in the mix, no question, but it's really markets working for low-income people. you know, i guess from the evidence i've seen that you could go to $15 on a minimum wage which is something that's been proposed, but you would have to phase it in over a long period because there are places in the country where $15 an hour gets you to around the 40th percentile wage, but i think the research would support that idea. >> okay. i would have to end the panel now. thanks again very much to our panelists. [ applause ]
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our conversation from the brookings institution on monetary policy and inflation continues. coming up, we'll hear from former fed chair ben bernanke and "new york times" columnist and authored paul krugman. >> thank you all for continuing the conversation. it's almost hard to believe there's anything left to say after those panels. so i was going to propose that we do this whole thing in rap. or maybe in finnish, but i thought that was a little unfair given that i haven't given the panel advanced warning of that. >> that's right. >> also, you wouldn't want to hear me. so i am joined here by olivia blanchard who's with the peterson institute, formerly of the international monetary fund
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and m.i.t. loretta mester, and ben beg your pardon -- ben bernanke, our colleague here at brookings, paul krugman, the economist at the university of new york and columnist for "the new york times." krugman is the guy that makes all journalists nervous because he seems to be more productive than the rest of us and that's kind of frightening given that he does all of these other things on the side, but we can discuss that later. so i wanted to start by asking each of the panelists a bit of what they took away from the conversation we had this morning. i want to start with olivier who makes the observation in the slide that you see behind us about that's been made about how the wage phillips curve behaves perhaps as one might have expected, but prices aren't rising and so the question is what the hell is going on? >> okay.
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so i had prepared a slide in anticipation, and i think it has survived the previous three hours fairly well and coincides with the general message and tells us where we need to look and what implications it has. the diagram on the -- which side is it? this one. is familiar except it's not in familiar form. it basically has the inverse of the unemployment rate and the rate of inflation merasured by the employment cost index and you can plot it in a scatter diagram, but it's there. i think that's consistent with everything we've heard. what people have put on the right-hand side typically is the phillips curve. price phillips curve. what i've done instead is plot the wage inflation using the employment cost index, which is the blue line, and the gdp price deflator which for the
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purposes of thinking about mark-ups is clearly a much better variable than the cpi, and this is what we produce. and basically, it's visually striking and what we saw from the previous graph that the wage inflation was kind of okay. 7 the philips curve was okay and there doesn't seem to be much of a deflation between the gdp price deflator and the employment cost index and it's fairly disconnect. people have talked about the pass-through and it's true, but there's a lot of variation in the price index, which is not coming from the cost index. these two dimensions. so starting there, my reactions today, so i think the first puzzle is the slope of a relation between wage inflation and unemployment and on this, i think, we're not clear as to whether the slope has really declined or not.
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my sense from my own regressions is that it has. but somebody argued that if you do it right, it really has remained more or less the same. i think it has decreased. and with the explanation, i think, is a very plausible candidate and subject to the test that i suggested, and it seems to work. the other is that maybe there has been a change in the bargaining structure on wages and basically, we think of bargaining as splitting the rents from the match. well, if the workers are already at the bottom end, there's nothing that can be done to decrease their wage. if everybody was paid the minimum wage, we would find no effect on unemployment and minimum wages. i think that something like this is happening, but i don't think we solved that one and we need to do it. on the mark-up and the second graph, is it -- what is it? what's going on? i suspect measurement is a big part of it. the more you know about the gdp
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deflator, the more you worry. we've heard various explanations about pricing. i think some of them say some sectors really have to take the international prices given and, therefore, you will not see the kind of pass-through but that's not two full sector so i think we need to do it the same way it was done for labor and try to understand it. again, there's still work to be done. on the past implications, which is the theme of the panel, this actually -- the stability of a wage phillips curve and instability of the price phillips church has a fairly big implication which i think hasn't been examined and probably should have been in the context of thinking about what the fed should do, which is to have a wage inflation target rather than a price inflation target. it clearly is much more related to labor market development. so from just an empirical point
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of view, it seems like a better measure to look at. but from a normative point of view, the mark-ups reflect largely distortions, then it's a good idea to take a mark-up namely wages. and when you see wage inflation at 3% and you see productivity off at 1%, then you're home. even if the gdp deflator in my case and the cpi and the core cpi moves around. so we had talked over dinner with janet and we said we would write a paper together. janet has been a bit busy, but i think that is still worth exploring. also, politically, actually, telling people that the fed cares about wages and has wage inflation as a target is probably a plus. >> does that mean you'll be tightening now because wages are rising? >> i would think it's more or less at full employment. wage inflation is about 3 something. productivity is around 1.
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that's consistent with a price level correctly measured of about 2. yeah. i'm more on the hawkish side these days than janet. >> oh, my goodness. >> lorena mester. i've noticed in a number of your presentations over the recent months, you have a lot of things -- if it's the case that nonmonetary structural factors are holding back measured inflation, then that's a very different implication for policy than if it's an aggregate demand shortfall. so i'm just sort of curious what sense you make of all this evidence that we've heard this morning on what's driving inflation and the work that you've done and your people have done at the cleveland fed. what explanations do you buy for what we've seen? >> so i grew up in baltimore, so h.l. mankin is from baltimore. he had this line that basically said for every problem, there's a simple, elegant solution that's wrong.
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so i don't think there's a simple one-word answer to this. so, yes, our inflation research center is doing a lot of work and trying to understand inflation dynamics. so we have results that basically say if you look at structural part of inflation, it is related to the labor market and the acyclical part -- the cyclical part and acyclical part or structural part. >> acyclical are things like health care price. >> health care, which is the big part of it. other parts that aren't really related that, you know, the cyclical part is only 40%, right, of inflation now. so part of what's going on, i think, is that you have idiosyncratic factors that affect the labor market, affect the inflation rates, and it's not just the labor market and tightness in the labor market. but if you just look at the cyclical part, it's certainly equated with tightness in the labor market. so i believe there is still this
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relationship and that we can use it to help predict inflation. that said, you have to recognize that there are these acyclical factors affecting measured inflation. and so i think you want to be careful about sort of trying to explain everything with what's going on in the labor market. so that means that if you see a shock, it may take longer to get back to your inflation target than it would otherwise. from a policy and explaining and a communications point of view, you may want to be thinking about a range as opposed to a point target because you have these shocks that are going to move inflation off of your target, even if your trend inflation rate is moving up. and so there are implications for how you think about, how you communicate your target. i think the results we saw today on inflation expectations were very provocative in the sense that it makes you think about a different way of communicating and perhaps a different way of thinking about the interplay
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between inflation expectations and your target. so from my point of view, you might have shocks that move inflation off your trend, but the trend underlying inflation rate will be driven by inflation expectations. and so i agree with the remark that janet made in the beginning that stability of expectations is key to allowing you to run your monetary policy. i think the results that talked about the amazon effect and the fact that pricing models are changing are very interesting, because it's true that prices are becoming more flexible, right, if you think about in a dsg model, why is monetary policy able to cushion against, right, these shocks on the real side? it's because of sticky prices. if prices become less sticky because there's more frequent price changes, that means monetary policy is less effective or said differently, you have to move your policy
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rate more to have the similar effect. so again, right, these changes, these underlying structural changes i think are more important than just how do you measure inflation? they may change the trans migs mechanism of monetary policy. >> ben, are you convinced that something has changed in the structural side of unemployment? or is it just for some accident of history we've had wise policymakers as sill vaughna points out and everything is still the same, the only thing changed is the quality of monetary policy? >> what an -- that's actually my opinion. i think the most important factor over the long haul has been changing not wiser monetary policy but a monetary policy focused on anchoring inflairks expectations. mark watson and jim stock studied the dynamics of inflation and the basic message was, 30 or 40 years ago if there
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was a shock to inflation, a significant part was permanent. it would stay away for a sustained period. since the '90s if there's a shock you go back to the underlying level. and that's consistent with the world in which inflation expectations have been well anchored. so shocks to inflation tend to be transitory as long as that policy is consistent with that. that is, by the way, savon is a way of thinking about it, i think it's complementary. if inflation i can peexpectatio ageored it can succeed. if policy is committed to keeping inflation near target they tend to be well anchored. i think that explains the broad changes in the inflation process. and probably helps at least to a first instance to explain that most recent behavior, part of the reason why inflation didn't fall so much in the recession
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because of expectations were wm anchored on the downside. they probably did fall some extent, which is probably part of the reason that it's been slow to come up. having said that, i think there are a lot of interesting points made today. for example, clearly part of the reason that inflation has been slow to come up is that the fed underestimated how far the labor market could be pushed along with what jarrod talks about yb u star, it's probably a little bit lower than the fed thought a couple of years ago, and that gives some scope for further expachbs in the labor market. the global factors that kept inflation from falling quite so much after the panic i think are relevant and the transmission of that to prices. there's going to be a bunch of idio sin kratic and other factors relevant. i think the change in the structure monetary policy is the most important. but all these other things are
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relevant too. >> paul, what sense do you make of all of this? >> yeah. it's maybe the most important thing is that we actually basically understand the economy a lot less well than we thought we did which has a huge bearing on policy. i actually wanted to say something about owe livier's proposal. i have thought something along the same linings and then kind of backed off it even though the he can norngz seemed to be right. here's the point. >> talking about targeting wages? >> targeting wages. there is one thing nobody talked about here but one huge success story of conventional monetary analysis over these past ten years has been the distinction between o core and headline inflation. i'm sure ben remembers even better than i do, we remember 2010, 2011 when headline
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inflation was going up because of oil prices and the fed was saying, calm down, it's core inflation we should be looking at and was totally vindicated. there's now stuff going on. if we think about conceptionually we mean stuff that is sticky, and the coriest of the core is in fact wage inflation. it makes a lot of sense to say, let's target wages. i'm trying to imagine the situation of the chair of the fed saying, we are raising interest rates because wages are rising too fast. i just don't think -- i think, you know, it's good economics but the political economy is just going to be disastrous. >> i think saying we are committed to make sure that wages increase no matter what at 3% a year. >> maybe. i think we've -- i think it's not just 40% of fins but a large proportion of the population as a whole that just doesn't get
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messages that complicated. >> ben, your body language su s suggested you're not reed to endorse that rule. >> i wouldn't want to sit in front of the congress and say we're concerned that wages are rising too quickly. that's a concern. i think it's a complicated question. there's elements of the price process which are independent of labor market and need to factor into the monetary policy as well. >> it seems that at the same time as we've had a long period of low below target inflation in many countries around the world, we've also seen this decline in the -- in our star, the so-called natural rate of interest, the interest rate that will prevail when all is calm. which as ben pointed out, we don't know what it is. but there is certainly
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widespread consensus that it has fallen a lot-it seems to me -- two questions. are these things related? secondly, this is kind of challenging. how should monetary policy think about a world where inflation at least for now seems to be persistently low and the natural rate of interest seems to have fallen and is also persistently low? >> well, i have a -- as you might guess, a some what facetious answer to the first part. it looks like u star and our star, if such things exist, it looks like both of them have fallen. why has u star gone down? we don't know. r star gone down? we don't know. the common factor is caused by, we really don't know. >> i thought that the catchall answer has something to do with dem og rauphy. >> if i had to make up a story i'd say dmography.
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you can make a story along those lines. the wage philips story is holding up better and makes it harder to tell the demographic story. if it's just older workforce, that should be showing up which is the less dramatic part of the story. but -- and i buy the dmog rauphy on cycle stagnation story. i would take the general policy lesson, it seems quite possible there's still quite a lot of slack in the advanced world as a whole. at the same time there is very little monetary space in the world as a whole, which should give us a lot of anxiety. we should be worrying a lot. if we're in this situation now where nothing really bad has happened lately, we're in big trouble if sooner or later if something really bad will happen. i think the two factors together mean that we should be worrying a lot about what can we do to give us some more space for
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policy response? which is going to get us to some of the other questions that you gave us about inflation targeting and fiscal policy. >> can i go back to the r star u star conundrum? i think it's a bit worse than we don't know. >> great. all right. >> because i think the main -- for u star is weakening bargaining power fundamentally. and that seems to be good news for the other side, for the capital side, the profit side, and the arc, the risky -- so i think in that light we are decreasing our star which i think is even more of a puzzle. >> great. so loretta. >> can i ask -- >> fortunately you have to make decisions without full information. >> we always have to make decisions without full information. i guess i'm going to push back on the fact that we have all the slack still out there. if you talk to firms, in fact we had a paneling yesterday at the
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cleveland fed, they routinely tell us, and this has been going on for years, about finding workers they can hire. you push back and say, okay where are you raising wages? they'll say yes. but that's changing now. now they're basically saying that it's not really worth trying to hire the -- of the pool that's still out there been because when they do bring them in, they don't stay on staff more than a month. sand so i say, do you know where they're going? they have no idea. it's not being bid away for other wages. what is the response now? the response now is, they're going to start automating more. you've seen that in all these firms. i think, you know, i would say that we have done a lot in terms of running policy much more accommodative than we would have in the past. partly that's because we brought down our estimates of u star.
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jarrod, if someone were going to say, relative to the old u star, we are running the economy very high. our economy is much more accommodative than on an old rule. i think we've taken on board some of the things you talked about in terms of, we have to rethink when we don't see wages going up, inflation going up, we have to rethink our policy rule. i think we've done that. but at some point there are unintended consequences. you may be ending up affecting long-term employment growth because if you automate more in these firms, you're not going to have the demand for labor as high. i'm very sympathetic to wanting to be at maximum employment. that's certainly our goal. i think the policy tool we have in monetary policy isn't really going to affect the overall labor market in the way that you want to. i think the things you pointed out in terms of the things that we talk about when we go out into the district, right, job
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programs, getting people the skill sets they need for running those robots that are coming into these plants, all those things are going to have much bigger impact on public welfare in terms of getting people to work. >> but -- >> there's a whole other set of issues about getting people to work which is another issue. transportation is an issue. there are a lot of structural things that have nothing to doing with monetary policy. >> i don't understand the problem. you run the economy high. workers that we pull lots of workers into the labor market. wages start to rise. firms state to automate which increases the rate of productivity growth and you're worried we're going to run out of jobs? >> yeah, that there is going to be a whole segment of the population. rye right now they don't have the skill sets. unless you are training them for the modern jobs you are in trouble.
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we've had a shift interest manufacturing to other types of jobs. there is a mismatch between the skills that people have and need to have to enter the labor market. it's going to be hard to improve outcomes. i think that's one of the things that the feds listen, conferences we've heard around the district time and time again. they're not that concerned about us hitting a 2% inflation target. they are much more concerned about, am i going to be able to provide food on the table for my family? i think we have to think a lilt bit about what tools we use for which problem we're trying to affect. >> ben, can i steer back to the question about the challenging -- low inflation and low -- what is the rights of policymakers and does it matter what your starting point is? our inflation is getting close to 2%. japan theirs are below 1%.
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what's the right answer? >> i think the decline in r star is mostly understandable. i think demographics, technology, all those things that a lot of people have talked about, they can explain most of what's going on. i'm more puzzled about the u star decline than the r star. that's something outside of monetary policy but it's contrained on it. i think i want to do a half empty, halffull response. there's this correct point that historically the fed has cut the federal funds rate 5.5% during recessions and now we only have supposedly 3% points of room. i think that if appropriate use of forward guidance, quantitative easing, some of these tools, plus thinking about different frameworks for policy, altogether, they add about 3% points of space. i think my sense is as long as
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nominal neutral rates are 2.5 to 3, that the fed will be able to do most of what it could do at any point in history in terms of using traditional policy rules. so i think that, you know, saying that we're now basically out of space in the united states, that's wrong. it is also though true that once neutral rates get much lower than 2.5 nominal, then you are running into a much more difficult situation. and then we'll talk about alternatives, fiscal policy and the like. but i think that, you know, asking for 5 and 6% points of space is not needed. i think these other tools can compensate for some of that loss. >> these are already partly used. some of it has been used already. >> they can be use the better and more aggressively, number one. but number two, i'm talking now about the next recession and what the fed will be able to do
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starting from where it is if there's a medium sized recession. >> do you think 3% points of unconventional monetary points an used? >> yes. >> paul krugman, are you as sanguine as that? >> i'm not sanguine. ben knows more about this than anyone. but i've just been a skeptic. the fact that we're still arguing about the effectiveness of qe after all these years i think is a per swaysive evidence that the evidence ain't that persuasive. and so it seems dubious. and let's also say we shouldn't have too much of a par oakial u.s. perspective here. the eurozone, how much room did they have for that? and so i think we -- a very large part of the whorled is already in pretty dire straights here and we have no idea about
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the size. yes, 550 basis points has been the historic cut, but that was way inadequate in the last recession. we don't think we're going to have another 2008 style shock but we didn't think that was coming either. i think we still have a fundamental problem -- we don't know we don't have enough policy -- there seems to be a substantial probability that we don't have enough policy room. >> what about europe and japan? they don't have the luxury we have, right? >> no. i was saying that they're in much more difficult situation. now, particularly japan, and this goes back to my initial comments about inflation expectations and being anchored, et cetera. one of the reasons to be aggressive about these policies, if inflation expectations get anchored at the low level then you're in serious trouble. the japanese situation is different than the u.s.
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fundamentally because the expectations, europe inflation expectations are too low but not nearly as low as in japan. i think there's some reasonable probability that they will eventually emerge from their current situation and achieve a more normal stance. but i don't disagree with paul that europe and japan are in much more difficult states than the federal reserve. i think honestly having been thinking about the evidence on qe that your comment about we're still arguing about whether it's effective or not, that's a median narrative, that the evidence is pretty strong that it's effective. >> i thought you were going to propose a higher inflation target and you completely threw me off my game. have you surrendered on the idea that 2% inflation is too low? >> never. there's a timing issue. i think it's still a completely reasonable proposal, as a
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solution. and that should be discussed as up. announcing today 4% is basically has zero creditability. i don't think it would help. that's probably not the time. but if you invite me in a few years. >> can i comment on that? we have research coming out of the cleveland fed, the argument seems salient, it's hard to argue about if. but if firms are then going to be more flex ible in their pricing and firms change their prices more often, it goes back to my original point which means that monetary policy will have to act even more aggressively to have the same impact. so you don't get as much space as you might think in terms of when you move the -- within a dsg model. >> i think wuf it wrong. prized are adjusted very fast. in principle things would be
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better, less need for monetary policy. >> but once you got into a downturn you would have less space. in order to be able to get 2% point of space you'd have to be more aggressive in your policy actions. it's the transmission mechanism is affected because prices are changing. >> but again, the recession, according to the models, it would be less bad. it's ambiguous i think. we can compromise there right? >> right. >> i disagree with owe livier saying this is not the time to fact about it, i agree, bootstrapping, the announcement that's -- i probably stepped this thing back by many decades by saying credibly promised 20 years ago, there's absolutely zero evidence that that works. but i think if we're thinking about laying the literal groundwork for what happens the next time things go really
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wrong, it might be a good idea to keep alive the 2% inflation target which has a peculiar history which based upon happenstance, partly that it turned out to be wrong, was not a good idea. and that comes to the next global slump, and we suddenly have a fiscally prof ligat germany and president bernie sanders and all this stuff, and we have the chance to have a combined monetary expansion, that the idea that stopping at 2% inflation is not a good idea, would be a good thing to have out there. >> loretta, some people say we don't have much inflation, but -- and it's terrific to enjoy the fruits of a lot labor market. but we are sewing the seeds of the next disaster by not taking
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into account enough the financial stability risks that we run by running low interest rates for such a long time. is that something to worry about, or is that just something that people worry about who have nothing to worry about, about something else? >> so i think what we've learned over the past, you know, several years is that we do have to take financial stability concerns into account when we're thinking about monetary policy. that's not to say to add it as a third mandate or whatever, but it is something that we have to take into account. and you have to recognize that if you're running very low interest rates, that you may be creating some financial imbalances that may come back to haunt you in the future. so i think you have to sort of understand that those kind of effects can occur. nelly, when she was at the board, she developed a whole structure for allowing the fmc to actually examine those kind
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of imbalances and actually monitor them. >> how much of a worry would you say that is today? >> i mean, there are some issues in terms of nonfinancial debt levels being high, commercial real estate pricing being high. but, you know, i think they're at moderate levels we can handle them. but i think it is something we have to think about partly because in theory we'd like to use macro credential tools to focus on our dual mandate goals. but in reality that's a hard thing to do because we don't have that many macro credential tools. and the fed recently did a tabletop exercise where we ran scenarios. so the financial community within the fed. we have a working paper out on the cleveland website that talks about the results that have tabletop. and it really is clear that when you get into a situation where,
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you know, financial instability issues come to play, we don't have many tools that we can actually use to address them. >> ben, there was some discussion earlier today about the importance of communecations in setting inflation expectations. and, you know, michael weber made the case that you really do have to worry about household and firm inflation expect tairks and just influencing markets participants and investors is inadequate. and he pointed out which i think we all know it's hard to communicate this stuff to ordinary people even the ones in the top half of the iq distribution. >> why are you pointing at me? >> you're in the top -- at least the top decile. do you think it's important -- does the fed have to worry about their ability to adjust consumer expect takes or can you get a long way there by the markets
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which definitely are influenced by the fed? >> let me first say i'm happy about the desire of the fed and other central banks to do more outreach and talk to the broader public. the fed has series, these are very important institutions, they need to be transparent, need the public to understand what they're doing. there are limitations to that obviously. but i think it's important to try to communicate broadly. from a technical perspective, i think you do get a significant way there as long as the markets understand your goals and maybe some of the pricing executives, the people charged with the pricing and wage setting. i think that gets you a pretty long way. the federal reserve model has two settings. it has a setting called model consistent expectations where everybody is assumed to know what the fed's target is and behaves accordingly. and model setting -- only the
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bond market knows what you're doing. you get two-thirds, three quarters of the way there in the second scenario. i'm sure it's the case that a large fraction of the population does not know what the federal reserve is much less what it's rate is targeting. i think the fed and other central banks would be well served by trying to increase literacy about these things. but i don't think that even some of these policies -- we'll be talking i'm sure about price level targeting, some of these types of policies that rely to some extent on forward looking behavior. i think that simulations and other analysis suggests that you get a good benefit even if only a minority of the population understands exactly what you're trying to do. >> to say on demand, monetary policy works basically through housing and the exchange rate. and so if you can get to the minds of the people who set mortgage rates and people who set exchange rates, that's all
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that matters. >> i wouldn't go quite that far, but -- >> inflation, what matters i think are firms to a large extent. and it's criminal that we don't have a good survey. >> criminal? >> of firms. yes. that's absolutely needed. when we look at households, their expectations play a minor role in the determination of wages. in the determination of wages it's the firms. we should have a survey of hr department inflation expectations. this is a really important variable to know. as far as i can tell, there is none in the u.s. and the new zealand example which i think was referred to this morning is not very convincing. i'm sure the people in the hr department are more careful than the households. >> i wondered if before we turn to the audience if paul, ben and
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olivier could give loretta some advice, abonot about what to do with interest rates, i'm sure she needs more opinions on what to do with interest rates, but the fed is involved in this rethink of its monetary policy framework. it has already ruled out olivier's raise the inflairks target option. but briefly what is it given all the things we've talked about, what's happened with inflation, what is the right thing to do with the framework to put us in a better place than we are today? do you want to start, paul? >> no. i have to admit i'm a little bit baffled. it feels to me as if the various things that we -- that our understanding of the economics such as it is suggest that it seems to be kind of impossible out of some combination of
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politics and institutional con straints. raising the insflaigs targets, they're extremely per swaysive but apparently off the table. wage targeting is extremely persuasive but i would say it's off the table. i'm not at all sure what the answer is. i'm supposed to be saying something helpful here, but i'm feeling like sometimes we've talked to developing countries and try to go through policy options and they say that would be impossible. you take all of the constraints and there turns out to be no space. >> could be there. ben? >> the federal reserve is talking about the so-called makeup policy approach, the idea being if you fall short of inflation, your target for a period of time as you have recently, there would be some compensation for that. the debate has turned on technicalities and would they be credible? i think there are things that
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could be explained equal taitively that could be explained. i've pro posed temporary price level targeting, where if you fall short of the target, you compensate for that to some extent. the version of that which seems to work pretty well is called temporary price level targeting with a one-year look back. you only keep rates at zero until you've established over a year that you can hit the target. you can explain that call taitively by saying when we're leaving, we want to -- like the european central bank, we don't want to start our process of normalizing rates until we have clearly established that we can meet the target. that -- over a year. that would be a fairly simple explanation. it would have most of the benefit, the fed would be very slow at beginning to raise rates from a zero lower balance situation and it doesn't involve
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complex targeting calculations and things of that sort. so that's just an capitexample. i think it could be done within the context of the target. in particular, that hitting the target momentarily is not enough. we want to establish that we are sustainably at the target. doing that with would have some of the makeup qualities that these approaches have and would not involve any major change. i don't think it would create any political scrutiny or confusion. that would be my confusion. >> olivier? >> i think we're flirting with the world of -- nation to different degrees. here we're flirting. in europe we have married it. and so in that world, policy is going to be very constrained and we see it in japan, we see it in
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europe. i totally support what ben is pushing, but i suspect it's very second order relative to the size of the task. and so that maybe you're going to be able to predict what i'm going to say. >> what about fiscal policy? >> it seems to me that, you know, fiscal policy in the same context is needed. it's cheap. >> because rates are so low. >> yeah. yes, the cost of debt is very low. and it can be used infinitely better. in the u.s. unfortunately i have no doubt that our president and our congress will used it probably not right but they'll use it. but in europe clearly the issue is to convince governments to use it. but it seems to me the solution is not try to do some more twist on money which i think we have to but not hope that's going to be the solution. the solution is to have a
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more -- fiscal policy. >> do you want to weigh in on this? >> i mean just the way you think about inflation expectations needing to be well ainkored to allow monetary policy to counteract negative shocks. i think for the fiscal policy, same thing. if we had fiscal policy on a sustainable path, you would be able to use it in a way we'd like to be able to use it. i think the same issue, i think just like we need to make sure that we're running monetary policy to keep inflaeks expectations anchored so it allows us to use monetary policy more effectively, i think the same thing with the fiscal side. we are in sort of a dilemma here. >> we have time for some questions. again, raise your hand, stand up, tell us who you are, and be as brief as possible. there's one here. i'm going to take three and then
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we'll see where we go. >> this is who are the whole panel. >> you are? >> grace good. this is for the whole panel. do you see a future of much more coordinat coordinate monetary and fiscal policy and what would it be like in that region? thank you. >> jarrod bernstein over here. >> instead of targeting -- sorry, jarrod bernstein. instead of targeting wage growth, how about targeting labor share? there are times you want it to be rising in order to rebalance factor shares that get whacked in a down turn. >> pass it behind you. >> thanks very much. mateas ma tai. i teach political science. my question is for the bankers mainly. i can't think of a decade where
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central bankers have been so attacked by politicians like mark carney, brexiteers, mario draghi, german politicians. is it something you actively worry about that this is going to get worse? is this something that that's going to go away? and is it affecting how people think about the credibility and the need for central bank independence? thank you. >> let's start with the coordination of fiscal and monetary policy. is that likely and what does it look like? >> i learned everything from krugman about this, and krugman thoug taut it only works if expectations go up. as long as its credible, you might as well just do the fiscal policy and have the monetary policy agree to be support niv some way. >> yeah. there's this idealized -- by the i'll call it the blanchard 4%
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target, although that's me too. we have a coordinated, a fiscal expansion, to get to, to that point which is ratified by monetary. that doesn't seem to be on the table anywhere. if we talk about actual coordination, i worry about who's coordinatestnating with him? i would be happy with mario draghi getting to set it p. i'm not happy with the german government getting to set ecb policy. >> olivier? >> i think the two dimensions of coordination, there is within a country fiscal and money, there is a coordination that can be done, simple coordination. you do something, tell a fiscal authority, you do something, and as a central bank, i react to it and make sure that i undo the affect if it's negative. i don't think it implies more than just that.
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greenspan is an example of that. coordination across fiscal policies, across countries, that's a much more difficult issue in the eurozone. there again i think if the yu eurozone goes for a -- it will be too weak. when belgium expands it doesn't get much of the reward. so there i think there is a need for coordination. whether it happens or not, it should. it probably will not, would be my answer. >> loretta, when the question was asked about central bankers being attacked, which is true, i had this image that paul volker would storm into the room and say you guys don't know. i think there is an attack on central banks around the world and on other institutions as well. i think he was wondering how do you cope with that as a central banker who doesn't seem like an
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evil person, at least from my conversations with you? >> thanks. i'll take that. look, i mean, i feel like i'm privileged to work at the federal reserve. it's a very honorable institution. i've met and worked with people like ben, and i can just tell you everyone is sort of focused on making sure that our policy is the best policy we can to hit our goals. you know, there are going to be challenged thrown in your face, one of them may be the criticisms we're getting in this environment. but it's part of the job that you guys have to kind of stick to the knitting and make sure you're doing your policy the best you can. there is no simple answer. that's why you see the discussions that we're having in terms of what's the way to go about doing it? what's the right policy? so you have to, you know, deal with that. i do have concern that, we get this question all the time, and if you've been in meetings, you
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know these considerations never enter the room in terms of our policy setting, but the fact we're getting these questions do make you take into account there are people that may not know these considerations aren't affecting our policy. >> jarrod's question about targeting labor share? >> i think it's a very different animal. i was targeting nominal wage growth, real wage growth, labor show is much more real valuable, so i would not touch it. >> i'm reminded, there's a great bernanke line in the transskrichs is when the bureau much economic analysis revises, he says if they can revise it retroactively, can we do the same thing with interest rates? i'll take two more. then we'll have to call it a day. >> bert elia, banking
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consultant. there was a reference to fiscal policy in acoordination with monetary policy. how real isistic is that in the united states today given the substantial deficits that we're run and a rapidly rising ragi ratio? is fiscal policy a response to a downturn off the table, given how significant the federal deficit is during a full employment economy? >> thanks. and the gentleman over there. >> ubs. president mester, you mentioned an inflation band. how wide would that band have to be? standard of 0.4 a year? caught cattio showed it's around 1.7, we're running 1.8. is monetary policy precise enough to be able to push it up
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0.25%. >> i think as a communication device we know it's going to vary for various reasons. having a band makes sense. it also allows you to allow you to have some scope to run inflation a bit higher in the band during good times, and then when you go lower, go into sort of getting closer to the zero, you know inflation will be below the 2%. >> so what, 1% points? >> that's not a bad target. thinking about how you'd want to run higher in normal times and less high in more down turns. >> i somehow for got to mention one place you have had coordinated fiscal and monetary policy is japan. in some respects their outcome has been dispointing. but one thing not been a problem is people losing confidence in the ability of the japanese
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government to repay its debts. and japan is far deeper in debt and has far worse long-term demographics than the united states. so the notion that the united states is anywhere close, the idea that we're anywhere close to the limits of fiscal policy seems to be utterly at odds with all of the evidence. >> do you agree with that? >> yeah. that's not justification for doing something crazy, but -- >> good to know. all right. this could go on for a long time, and i really want to thank all the presenters and -- because we had a pretty good group of people. i want to thank any colleagues who helped organize this. thanks for the questions. if there's paper or coffee cups at the back of your room, there's a trash can in that corner, we would appreciate that. please join me in thanking
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everyone. [ applause ]
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