Ho visto dei riassunti fatti da altri ma ho pausa di averli eliminati.... devo anche essere sincero ma non vi ho dato estrema importanza ma magari e' stata una cazzata..
Non so se ti è andata bene ,non è Hatzius...
Staff of the Federal Reserve Board recently issued two papers on monetary policy for the upcoming 14th Jacques Polak Annual Research Conference, which is hosted by the International Monetary Fund and takes place on November 7-8, 2013. The papers are “
The Federal Reserve’s Framework for Monetary Policy—Recent Changes and New Questions,” and “
Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy.”
Using a question and answer format, we set out in this note our initial views on each document and what the conclusions may imply for the conduct of monetary policy. We use a question and answer format to provide our comments.
Have these findings changed Barclays’ view on monetary policy?
Our views on monetary policy have not changed as a result of these papers. We continue to call for a tapering in the pace of asset purchases in March and a firming of interest rate policy beginning in mid-2015. The minutes of the recent FOMC meetings, FOMC communications, and SEP projections, in our view, are consistent with some combination of “optimal control” and “flexible inflation targeting” (whereby policymakers target price stability with an eye on other macroeconomic variables of interest like unemployment and output). We see staff and FOMC participants as being broadly aligned on this framework, with differences arising from interpretations of the robustness of the framework and individual assessments of the merits of the cost-benefit analysis.
Although the conclusions of the papers, when viewed together, would support a reduction in the unemployment rate threshold for interest rate firming and, to a lesser degree, an increase in the near-term inflation forecast threshold, we view changing either of these thresholds as a potential policy option down the road and do not see such a change as imminent. If the Fed does take this step, we believe it need not happen at the same time the Fed tapers; policymakers may prefer to see how markets respond before taking additional policy action. Whether or not a reduction in the threshold achieves a desired outcome is heavily dependent on the estimate of NAIRU and to what degree factors slowing potential GDP growth are structural in nature. The committee may need more time to digest the incoming data before coming to a consensus.
Who are the authors and what weight should be given to papers written by Fed staff in determining the conduct of policy?
The authors of the papers comprise the most senior leadership of Board staff. In particular, Bill English is the Director the Division of Monetary Affairs and David Wilcox is the Director of the Division of Research and Statistics. Their presence on the papers suggests that the conclusions represent the broad consensus of Board staff and, consequently, we believe these papers publicly reflect what the staff is likely communicating to the FOMC in private during its deliberations. That said, the conclusions of the papers are not prescriptive . Federal Reserve staff research is intended to support the policymaking process and helps set the stage for debate during the regular policymaking cycle. Different members of the FOMC may draw different conclusions about what constitutes appropriate policy based on their interpretation of the research and robustness of the analysis. Put differently, Federal Reserve staff research should not be interpreted as providing specific recommendations as much as providing an assessment of outcomes under various policy proposals. We suggest a careful reading of the papers given that the results are likely to be more balanced than some media interpretations, which could very well be stronger in tone.
What is the Jacques Polak Annual Research Conference and is it a venue for making policy pronouncements?
The conference, conducted annually, is hosted by the IMF and serves as a venue to discuss innovative research on a wide range of issues to facilitate the exchange of views among researchers and policymakers. This year’s conference theme is “Crises: Yesterday and Today.” Stanley Fischer, a former First Deputy Managing Director of the IMF, will also be honored for his contributions to economic policy. The conference is open to the general public. A copy of the program can be found
here on the IMF website. The conference, while of importance in academic and policymaking circles, is not one where we would expect to hear significant policy pronouncements from the Federal Reserve. We do not see these papers as part of the Fed’s communication efforts and policy of increased transparency.
What are the main conclusions of each paper?
The Federal Reserve’s Framework for Monetary Policy—Recent Changes and New Questions details the Fed’s efforts in responding to the Great Recession, including the use of forward guidance and large-scale asset purchases (LSAPs) as unconventional policy tools. Much of the content, in our view, is not new and can be viewed as a more complete formulation of the “optimal control” framework outlined by Vice Chair (and prospective Chair) Janet Yellen on April 11, 2012 in a speech on
The Economic Outlook and Monetary Policy. The authors justify low-for-long policy rate guidance and LSAPs as a means to reduce the unemployment rate faster than would be the case under more simplistic policy rules (eg, Taylor rules or first difference rules). The optimal control framework suggests that the gains from reducing the unemployment rate faster than would be the case under traditional policy rules would outweigh the cost of modestly overshooting inflation relative to the Fed’s target. This result comes, in part, due to the assumption of a nonlinear loss function that yields larger welfare losses the further inflation or employment deviates from its target. In the current environment, where the unemployment rate is viewed as being further away from the Fed’s long-run goal than is inflation, a net gain in welfare can be achieved by accommodative policies that drive unemployment lower at the expense of more inflation.
The outcomes under optimal control, however, are dependent on some fairly strong assumptions. The framework the authors use assumes that “private agents fully understand the future economic implications of each rule and that the central bank enjoys complete credibility.” In the model, the private sector and the central bank agree on how the economy works, the private sector understands what the central bank is doing, the central bank understands how private agents will react to central bank policy, the policies the central bank puts into place are fully time consistent, and actions of policymakers are fully credible. One reason inflation does not move more significantly above its long-run target, for example, is that the pledge of policymakers to eventually tighten interest rates faster and overshoot the terminal rate under traditional policy rules is fully credible. Consequently, long-run inflation expectations remain stable and permit a more favorable trade-off of lower unemployment for modestly higher inflation. As the authors note, “such ‘optimal’ policies might be viewed as theoretical references of limited usefulness”.
Recognizing these strong assumptions and the strong probability that this outcome cannot be achieved in reality, the authors then turn to how the committee used its threshold-based forward guidance to achieve as much positive benefit as it could. By conditioning its willingness to consider a higher policy rate only when unemployment fell below 6.5% so long as near-term inflation expectations remain below 2.5% and inflation expectations remain stable, the committee is using a conditional commitment device that will provide more stimulus than traditional policy rules would prescribe, although the amount of stimulus would likely be less than the stylistic fully optimal policies under complete credibility. In short, enhanced forward guidance may get the Fed as much accommodation as can be reasonably expected in practice.
The authors then conduct simulations around various unemployment/inflation thresholds and assess economic outcomes. In general, the authors conclude that the cost-benefit analysis of reducing the unemployment rate threshold would be greater than raising the inflation forecast threshold. This is likely because the level of NAIRU is assumed to be 5.5% in the near term and 5.25% in the medium term. Thus, providing additional conditional commitment through a lower unemployment rate threshold can result in more accommodation, lower unemployment, and relatively few costs from temporary above-target inflation outcomes. The results could be used by some on the committee to argue for a lower unemployment rate threshold, should they choose to rely on the optimal control framework.
That said, we emphasize that the benefit of this action is linked to the assumption that NAIRU is within the FOMC’s central tendency. Our own view is that NAIRU is higher, which would imply higher potential inflationary costs from lowering the unemployment threshold and a worse cost-benefit trade-off. San Francisco Fed President Williams has made similar arguments, saying that uncertainty around any NAIRU estimate is high and that policymakers may be better served by keeping the 6.5% threshold in place and conducting policy in a more discretionary manner once the threshold has been reached. Other center-leaning FOMC participants may also share this view and we read staff conclusions in this regard as providing justification for a lower unemployment rate threshold, but that view need not be binding on policymakers. In addition, financial stability concerns surrounding a higher balance sheet and low-for-long policy rates may lead some on the committee to argue for caution. Nevertheless, the results of the paper do provide an opening for a reduction in the unemployment rate threshold. Whether this takes place at the time the Fed tapers is not clear; policymakers may prefer to see how markets respond before taking additional measures. The incoming data flow will likely play a role as well, particularly if inflation begins to return towards the Fed’s target more strongly than it had anticipated.
Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy can be seen as a complementary paper to the one above. The paper examines post-crisis aggregate supply issues including GDP potential and the extent to which any damage in labor markets can be viewed as structural or as a result of inadequate aggregate demand.
The authors use a state-space model to decompose the elements of potential GDP and report two estimates of potential GDP growth, one with exogenous level shocks and a second without. The results of the two exercises are fairly similar, suggesting that potential GDP growth has slowed to around 1.0-1.5% in recent years and should pick up to 1.5-2.0% later in this decade. Contributing factors to lower GDP growth, in their view, include slower population growth, lower labor force participation rates, a higher natural rate of unemployment, changes in the workweek, and lower trend labor productivity. Within the latter, the authors estimate that labor quality has not changed substantially and, instead, that the decline in productivity is more likely a result of less capital deepening and multifactor productivity. The results of this exercise are similar to our own views, where we estimate potential GDP growth at 2.0% for the coming decade.
As part of this exercise, the authors do concede that there is evidence to suggest that NAIRU has risen by about 1.5% following the financial crisis and take a balanced look at this from several angles. They also indicate that much of the decline in labor force participation rate is likely structural, although demand elements remain a factor. This is not surprising since one of the authors, William Wascher, was part of a group that accurately forecast the structural decline in labor force participation nearly a decade ago (
The recent decline in the labor force participation rate and its implications for potential labor supply, Brookings Papers on Economic Activity, 2006, vol 37, issue 1, pp. 69-154).
However, the authors caution against extrapolating the effects of lower GDP potential and higher NAIRU on monetary policy. They go on to examine three factors that indicate some of the aggregate supply effects of the crisis may be endogenously related to a shortfall in aggregate demand. In particular, hysteresis could cause a slack in demand to have long-run implications on NAIRU and productivity. Multi-factor productivity may also suffer because new business startups, which are a source of innovation, suffer in economic downturns, and may have suffered disproportionately more in the current downturn due to the depth of the recession and tight credit. Finally, cutbacks in business spending on equipment and software and structures investment could lower the estimated productive capacity of the economy. In each of these cases, the authors argue that accommodative monetary policies could mitigate the negative long-run aggregate supply implications. The authors caution that these estimates are highly uncertain and financial stability risks may also play a role in keeping the stance of policy cautiously accommodative.
We interpret these findings as consistent with the optimal control framework. If aggregate supply shocks were structural in nature, they would otherwise call for less accommodative policy. However, if they are determined, in part, by endogenous demand factors, then highly accommodative monetary policy that places an emphasis on reducing unemployment and bolstering aggregate demand is appropriate. Imprecision in identifying the source of the aggregate supply disturbance plus financial stability concerns arising from a large balance sheet are mitigating factors that would suggest policymakers move more cautiously.
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