Whose Recovery?: Where Is the People's Central Bank Woodrow Wilson Thought He Was Creating?

Notes on the FRBKC Jackson Hole 2015 Economic Policy Symposium...


Federal Reserve Bank of Kansas City Research Director Troy Davig and President Esther George have come up with the right topic for their program this year:

Inflation Dynamics and Monetary Policy:

What the best guess are as to how inflation will evolve if economic policies remain on their current track--or if policies change--is the topic that most urgently absorbs central bankers right now, and our base of knowledge is pitifully thin...

Papers and Round Tables:

  • Simon Gilchrist and Egon Zakrajsek: Inflation Dynamics Through Firms’ Pricing Behavior: Discussant: Pete Klenow. Gilchrist and Zakrajsek argue that financial-panic driven downturns are unusual in generating relatively little downward pressure on prices. Why? Because the sudden emergence of credit constraints in a financial panic-driven downturn shortens the horizon of firms, and makes them willing to try to generate cash flow now at the expense of their long-run customer base by overcharging their current customers. Thus the relationship between prices and output that we see in normal times and in monetary tightening-driven downturns does not hold during financial crisis-driven downturns. The argument is powerful and ingenious--but, perhaps, too ingenious. Maybe this is just my old-man-yelling-at-clouds dislike of conclusions that are emerging from DSGEs that we really do not understand very well. Maybe not. And so my overall reaction is perhaps. This is very interesting, but...

  • Gita Gopinath: International Aspects of Inflation Dynamics: Discussant: Charles Engel. Gopinath's central point is that the U.S. is even more the center of the U.S. economy than we had thought, that the U.S. has an additional source of exorbitant privilege--the value of dollar-invoicing in a sticky-price world--than we had thought, and that the Federal Reserve is even more the monetary hegemon of the world than we had thought, since with great exorbitant privilege comes great power, and with great power comes great responsibility. Her findings on the asymmetry of the international transmission of the effects of monetary policy are, to my eye, strikingly large. And so the U.S. has a marked degree of what Gita calls "privileged insularity" both in terms of its own insulation from and the transmission of other countries of its inflation shocks.

  • Central Bank Perspectives on Inflation Dynamics: Thomas Jordan, Rodrigo Vergara, Athanasios Orphanides.

  • Lunch: Li Daokui

  • Jon Faust and Eric M. Leeper: Reinflation Challenges and the Inflation Targeting Paradigm: Discussant: Takatoshi Ito. Faust and Leeper argue that central banks' basic policy framework is wrong. That framework--away from the zero lower bound at least--has cyclical dynamics with modest and transitory fluctuations of real activity and inflation around their targets appropriately damped by a central bank that pursues a stable and predictable interest rate rule. But, they say, disparate confounding dynamics--fluctuations across countries and sectors in productivity and factor growth, debt growth, inflation rates, and financial market premia are the dominant features of the world relevant to monetary policy. Thus "the conventional view of normal cyclical dynamics has historically been of essentially no value in predicting inflation dynamics." Rather, in predicting inflation dynamics, understanding what the disparate confounding dynamics is the principal task. How policy should be conducted in the really existing DCD-dominant world then, I think, becomes a very sticky puzzle.

  • S. Borağan Aruoba and Frank Schorfheide: Inflation Dynamics During and After The Zero Lower Bound: Discussant: Lucrezia Reichlin. A remarkably strong conclusion in this line of research--that "the aggressive unconventional monetary policies in the U.S., in contrast to the more measured responses of the Bank of Japan, may have prevented a switch to the deflation regime in the U.S." I am not, however, sure that their theoretical claim that "multiple equilibria can arise... [that] allows us to rationalize disparate cross-country experiences but it also generates a lot of uncertainty about the effect of economic policies." As I understand it (and I may be wrong), the equilibrium multiplicities they worry about exist only under pure interest-rate targeting, and vanish if the target is some weighted combination of interest rates and outside money stocks.

  • Global Inflation Dynamics: Mark Carney, Vitor Constancio, Stanley Fischer, Raghuram Rajan