Transcripts For CSPAN3 Monetary Policy And Inflation Target Panel 1 20180110

Are needed. Its 2 15. Good afternoon and welcome. Im david wessell, director of the brookings. Thank you for coming and people joining us online. I bring greetings from glen hutchens, the benefactor of the hutchens center, whose chartered plane was canceled so he cant be here today. Hes probably watchology his phone and will undoubtedly be weighing in on everything i did wrong in the first opening segment. When we think that question of rethinking the 2 inflation target is one of the most important questions facing Monetary Policymakers at the moment, you might say that the backwardslooking question we need to think about, which we at hutch. Scenter are thinking about, is how did unconventional policy really work . And should unconventional policy really be considered conventional policy . But we look forward, i think one of the youd have to argue one of the biggest questions now is whether, given everything we know, whether a 2 inflation target framework is the right one for Monetary Policy. After all, when it was conceived, nobody anticipated wed have so many years of trying to get inflation up to 2 . Nor did we think that the longrun equilibrium Interest Rate would be so low that in the last federal and Market Committee survey of Economic Projections, the members said that they expect the longrun rate to be a nominal 2. 8 to 3 . Which means that theres not a lot of room to lower rates, real rates below zero, as we usually do in a recession. When we first conceived this event, one of the reasons we did it is we felt that this was a discussion that was really important but hard for the members of the f1c to have. If you Start Talking about this you frighten the markets and bad things would happen, so you dont talk about it in public. I think we were right that this is an important issue, we were wrong that f1c members are afraid to talk about it. The minutes from the meeting suggest that its been discussed and a number of Regional Fed Bank president s and chairman yellen herself have raised it. But i think that this is not a dilgs decision that can be left to Federal Reserve policymakers or the economists who spend time thinking about Monetary Policy. This is too important a decision to be left to the fed and the economics profession itself. It has to involve a broader array of people, a broader discussion in our society. So this is our attempt to try and explain what the issues are, what the choices are, what the pros and cons are for that broader audience. And im hoping that we can do that. Well try and synthesize this at the end. We have a very crowded schedule, which were extremely pleased about. Its hard to imagine you could have assembled a better group of people to discuss these issues than the ones we have. So im just making a public plea to our speakers that i made in private, which is try and stick to our time schedule so we can get everybody can get a fair shot. Well start with a conversation with Larry Summers, the former treasury secretary, who has raised this issue in public, is going to set the scene for us. Then my colleague Louise Shaner will come and introduce a upon nel to discuss the alternatives. Larry summers. My job at a conference like this, a the a moment when i am not in government, is to surely be provocative and hopefully be sound. My propositions are at root two. One, first proposition, our current framework is likely to involve unnecessary costs in lost output on the order of 1 trillion a decade, or 100 billion a year, relative to what otherwise would be possible. And two, a proper, better framework, which we shouldnt necessarily move to immediately, but we should ultimately aspire to, would involve normal, nominal Interest Rates in the 4 to 5 range. Let me develop this, these arguments, in several stages. First proposition, within the current policy framework, were likely to have by historical standards very low rates for a very large fraction of the time Going Forward, even if in good economic times. David just shared the feds view, which is that the neutral real rate is in the neighborhood of 1 . Were at more risk, at least currently, of falling short of the 2 inflation target than we are of exceeding the 2 inflation target. Its a good rule with official projections. Think about the weather bureau, that when they keep being revised in one direction, theres positive serial correlation in the revisions. So it would be my judgment that further reductions in the real predictions of the neutral real rate are more likely than further increases. The market essentially shares this view. The long run libor forecast is 2. 3 . 2. 3 is less than 2. 8 , but the market is projecting the expected value, the fed is projecting the mode. That is a reason for some discrepancy. On the other hand, the markets forecast builds in a term premium, whereas the feds forecast doesnt build in a term premium. Reasonable judgment, then, if we continue to operate in our current framework, its a reasonable expectation that in good times, rates will be in the 2 to 3 range, typically. And it seems to me obviously thats a projection made with substantial error, but i cannot see good reasons for thinking that the fed and the markets estimates are massive underestimates. Second proposition. Recessions will come. What is the likelihood of a recession . My reading suggests that the best thinking is that recoveries, unlike people, do not die of old age. That the probability of recession once one is significantly advanced into a recovery is essentially independent of the length of the recovery. And that that probability, depending upon just how far back one looks, is something in the neighborhood of 15 to 20 on an annual basis. Thats a historical reading looking back through 50odd years of u. S. Business cycle history. Is it the right view Going Forward . You can make a case that its an understatement of the risks Going Forward. That case would emphasize that normal growth is now 2 rather than 3. 5 . So you have to slip less far to fall into recession. It would emphasize a higher degree of geopolitical risk now than in the past. It would emphasize that we have a more financialized, more levered economy with higher ratios of wealth to income thats therefore more at risk of financial disturbance. A case for more optimism, would be the past probability is an overestimate would emphasize lower inflation and less risk of inflation getting out of control, forcing the fed to hit the brakes hard. It would emphasize smaller inventory cycles in a lesstangible and physical economy. Im not compelled that one of those sets of considerations is far more important than the other. So i think 15 annually is a reasonable estimate of the probability of a downturn. Third observation, Monetary Policy of the standard form will lack room to do what it usually does. On average, rates are reduced nominally by 5 Percentage Points in order to combat recessions. The low numbers are at the beginning of the period when there were very substantial credit rationing effects that were important in understanding how the economy functioned. So that 5 strikes me as, if anything, slightly on the low side. If you look at nominal rates, you conclude a 5 reduction is necessary. If you look at real rates, you similarly conclude about a 5 reduction in rate is necessary. You can see where this is going. 5 is substantially more than 2 to 3. The likelihood, i would argue the overwhelming likelihood, is that when recession comes, policy will not have sufficient room to cut rates as much as it would like to within the current framework. If one believes that neutral real rates will decline further, or that theres a risk that they will decline further, this effect is, of course, magnified. These conclusions are not very far from those reached in a much more elaborate way by kylie and roberts. Kylie and roberts conclude theres a 30 to 40 chance, 30 to 40 of the time well be at the zero lower bound. If you assume that once every seven years well be in recession, and you assume that once we get into recession we rates will be constrained by the zero lower bound for three years, one gets that well be at the zero lower bound about 30 of the time, given our current framework. Observation four. If within this framework the expected output losses are large, kylie and roberts estimate an output loss above 1 of gdp on average. That would be at current magnitudes over the next decade about 200 billion a year. I think its plausible to suppose that their estimates are too high. I have a much more back of the envelope approach. I said, suppose when we get into one of these episodes and were constrained for three years, about 40 as long as we were constrained after the 2008 crisis, that well lose 1 of gdp the first year relative to where we would have been, 2 of gdp the next year, and 1 of gdp in the last year. If you take that number, you get a loss of about 4 of gdp once a decade. That works out to about 1 trillion over the next decade, or 100 billion a year. The calculation could obviously be wrong if recessions were more frequent or they were longlasting or a negative spiral developed or there were historesis effects. You can imagine reasons why the calculation would be an overstatement. But it seems to me hard to argue that what i have said is way off as an estimate of the cost of the insufficient ability to adjust Monetary Policy. How can this calculation be way off . I might ive addressed the question of whether im way off on the frequency of recessions or way off on the amount of Interest Rate cut that is necessarily when you have recession. Ed the main challenge to this type of calculation, it seems to me, is the suggestion that alternative forms of stimulus can be provided, and so the zero lower bound is not an important constraint because monetary stimulus can be provided nonetheless. Thats what janet yellen tried to argue in her jackson hole speech in 2016. I am far from convinced, and i would make these points. First, starting at 2. 5 10year its, if you simply imagine that the economy goes into recession, and then you imagine that the fed cuts rates four or five times to a 25 basis point Feds Fund Rate and nobody does anything else, the 10 high year rate will findist way down to 1. 5 or in that range. It seems to me quite questionable how much extra stimulus would be developed by any further reduction below 1. 5 Percentage Points. Thats possible. And that applies with respect to any monetary that argument applies with respect to any monetary device that might be developed. With respect to quantitative easing, i would note that theres less room now than there was previously. That it is far from clear in retrospect that it is as effective once periods of major liquidity are removed, as is often supposed. As ben acknowledged, it doesnt really work in theory. I think the evidence now is much less clear than it once appeared that it works in practice. Especially in light of the awkward fact which most discussions of qe pass over, that the quantity of u. S. Public debt that markets have to absorb has increased rather than decreased during the qe period. Given the activities of the treasury. And given the further observation that the swap spread is negative. Somewhat inconsistent with the suggestion that theres an induced short supply of treasury debt. So i am completely unconvinced that qe can be our salvation next time round. What about Forward Guidance . The fact that the fed is moving with some vigor towards tightening, while inflation is at this moment well short of 2 . The fact that the fed is not willing to predict inflation above 2 at any moment, even a hypothetical moment of the tenth year of recovery with an Unemployment Rate of 4 , must be undercutting whatever credibility might previously have attached to the idea that a Federal Reserve would be willing tom with substantial ly super 2 inflation rates. Finally there is the possibility of fiscal policy. I would only note that growing levels of the debt to gdp ratio coupled with readings of a political process and the way the political process responded to the aftermath of the recovery act suggest little basis for serenity that substantial fiscal policy will be quickly entered into the next time the economy goes into recession. My conclusion therefore is that we are living in our current framework in a singularly brittle context in which we do not have a basis for assuming that Monetary Policy will be able as rapidly as possible to lift us out of the next recession. And, therefore, that a criterion for choosing a monetary framework when we next choose a framework should be that it is a framework that contemplates enough room to respond to a recession, meaning nominal Interest Rates in the range of 5 in normal times. Whether that is achieved through changing conventions on how one permits a bothtarget inflation, providing for adjustment to changes in based on the price level rather than the rate of inflation, or whether that is done in the context of relying on nominal gdp, seems to me to be a question of second order importance. What is of primary importance is that we establish a framework in which our best guess is that we will have room, rather than that we wont have room to respond to the next recession. So i would suggest as a design criterion that an appropriate framework allows for a 5 nominal Interest Rate in normal times. I would just conclude by observing that if i am wrong and we assume i am right, we will live with marginally, perhaps more than marginally, higher inflation. But if we if i am right or if the trend towards a declining neutral real rate continues and we ignore it, we will put ourselves at risk of very substanti substantially exacerbating the next recession. And that the consequences for welfare, not to mention political economy, i would suggest dwarf those of marginally higher inflation. So i would hope that all consideration of monetary frameworks emphasize centrally the need to provide for adequate response to the next recession. Thank you very much. Thank you, larry. One question, then well take a few questions from the audience, then we might be able to respond in the next session as well. If you had to decide today what the new framework should be without regard to the difficulties of changing it, do you have a horse in this fight . A horse in this race . Which one would you choose . I really wanted to emphasize that something that would have a normal Interest Rate of 5 is much more important to me than the tactical choices. If i had to choose one, i would choose a nominal gdp target of 5 to 6 . And i would make that choice because it would attenuate the issues around explicitly announcing a higher inflation target, which i think are a little bit problematic on political economy grounds, and because it would build in the property which i think is desirable that the slower the underlying growth rate, and therefore the less likely to mean lower neutral real rate and is likely to mean less normal productivity growth which is relevant for the zero floor on wages. And so a nominal gdp target has that as an advantage. That would be my bold, big step. My smaller, i think more practical step, would be an explicit acknowledgement by the central bank of an object iive super 2 inflation in the late stage of an action pansion. Based on the confidence that a recession would come at some point and would provide for some further disinflation. And by doing that, one could preserve the 2 inflation target, justify a more expansionary policy today, and it seems to me, be entirely responsible. I dont think it is possible to reconcile the forecasts of 2 inflation with not a single dot above 2 inflation on forecasts assuming continued expansion with the claim of being symmetric about the 2 inflation mandate. Thank you. I should have noted, people are welcome to stand in the back if you like, but if the room, just out across the hallway, we have a big screen and you can sit down if you like. So anybody who wants a seat should do it. Ill take a couple of questions, let larry respond, then well move on, if anybody has one. Roberto . Theres a mike coming. If you would tell us who you are and please make it a question, which has a question mark at the end. Ill try to. Roberto macron. All this discussion assumes the neutral rating gone to stay low. Anything in your view, any realistic policy that can be implemented that changes that . Thank you. Take another one . Steve . Larry, do you envision any fiscal response to this next recession . As in, would you then i know the horse has left the barn with this particular year, but envision creating fiscal capacity right now in order to let fiscal play a part and not put all of the recession response on the monetary side . One more. Yes . Gentleman here. Wait for the mike. Please tell us who you are. That was roberto perli, steve leaseman, and you are . Patrick lawler. Our experience with inflation, im guessing 3 to 4 range, which might be consistent with your target nominal rates, our history doesnt show any ability to keep a rate in any kind of narrow band at that point. Are you at all concerned that raising inflation that much might engender much wilder sw g swings in what kinds of things Monetary Policy is expected to respond to . Three good questions. Answer them in the order you like. All questions to the form, am i at all concerned . The answer is, yes. I do not share your reading of the 1980s, for example. When inflation was in the 3 to 4 range and seemed to me to remain in control. Furthermore, i think that there is a natural corrective in the form of intermittent recessions which would tend to bring inflation down. I could conceive that this would become a problem, but i guess as more and more time passes, i come to see the 1970s more as the worlds first experiment with pure fiat money, from which it learned painful lessons, and less as a prototypical event that characterizes whats going to take place Going Forward. So i dont have that as a concern at the level of the trillion dollars a decade, at least, that i think were putting at risk from this brittleness problem. Steve, if we really could work Counter Cyclical stabilization policy well in our political system, that would attenuate somewhat these arguments. But its actually a pretty complicated business, even if you leave aside the infirmities of our political system. Whats the instrument in the Counter Cyclical stabilization . It turns out to have it be i live this, helping to design the economic recovery act. It turns out to be very difficult to turn spending on and off. On the spending side. If you insist on developing backlogs of infrastructure projects, youll get projects delayed, to wait for your Stimulus Program just at the moment that you want them. It turns out just to be very hard. I spent the better part of an afternoon trying to figure out how to give money to the nih in a useful way, which they could only spend in the next two to three years. And it turned out to be very, very hard to do. And if you rely on the tax side, theres a question as to just how high the marginal propensity to spend out of anything you do temporarily on the tax side is. So even before you get to the political problems, i think fiscal policy is a somewhat problematic, is a somewhat problematic instrument. So the question on the neutral real rate, look, my view is that the neutral real rate is being shaped by some very profound structural things that i would call the demassification of the economy. Law firms used to need 1,200 square feet of space per lawyer, now they need 600 square feet per lawyer. Nobody wants malls anymore because theres eshopping. Startups used to require 5 million of capital, now they require 500,000 of capital. Our canonical technology companies, apple and google, have as their Central Business problem what to do with all of their cash. And how to disburse all their cash. An environment of that kind it seems to me is an environment thats going to have structurally low real Interest Rates. 321 . Another is that you extrapolate at one or two and then another answer is three and it is hard to know the answer is but i look at the downward trend of almost any proxy and i am at least as worried the rate will fall as i am of the belief that it is going to rise you have to take the fact of the indexed bond market and its telling you neither in the United States nor europe or japan is the expectation that that 2 inflation target will be obtained over decade that there is substantial doubt on dash the that stimulus. So if anything the assumption of the 1 rate is way too high as a certainty equivalent estimate of the real rate and how you should calculate that recognizing if it is too high that is a serious problem and if you are too low it is much less serious. Now the policy director came to us from the Federal Reserve and learning what the hell they do at the Federal Reserve with Monetary Policy anyway. [laughter] [laughter] so to have a brief introduction we are making the case why we talk about the alternative so we will get into the nittygritty what would you do and why . We have assigned people a task we have an amazing panel that doesnt need an introduction but i will tell you what is coming so first found peterson talk about the pros and cons of raising the inflation target and then talk about nominal gdp targeting. And then we will talk about the advantages and disadvantages of the price level target and then why we might want to stick with the current framework. Then ben vernacular will respond to all of them. And then when they are finished we will have a conversation. So i have been given the task to talk to the target rate so the 2 target as a precise estimate comes out of nowhere. There is a very nice survey looking at 161 papers on the inflation rate of those these are the ones that typically go the friedman route. And ignore the rest. Nine say between two and six. That gives a sense of what you get so looking at those studies none of them comes close to capturing the benefits of inflation. It is very hard to formalize them and most of them dont do that. One is with the welfare cost of inflation. 2 is a political number so the second point is whatever rate you thought was optimal 2006 you have to revise that up. For two reasons in the first is a mutual rate has decreased but there is that possibility that is the branch of the four and we know there can be a large and a deep recession so for both reason 2 is exactly the right number but it cannot be the right number today it has to be higher. So what do you do next . From the conceptual point of view it is a negative nominal rate so we are moving to that moment that maybe we can cast on keep cash but there it will be the solution where we are in ten years i suspect that is the way to do it. But not yet. So sometimes we need inflation so to generate when we need it but if you just have it when you need it it is much better if you can so they convince people when inflation is strong then there will be no inflation later. It can be that variation with that compilation it doesnt when its needed on one side but not the other. So i feel rather negative and pessimistic of moving expectations in that way. So if you could that would be a solution. So what is next i have no doubt we can get there we will just get to whatever number whatever the cost of 4 i really dont see that cost a 4 to to be that much higher than 2 . It just has to do with the tax system. And to index many of those would get rid of that. So one distortion that some of them would get confused that we know from the welfare point of view in a way that makes people happier they think the nominal rate is a real rate but then they make mistakes to choose their portfolio. So this is an issue we have to think about. This is the fifth point now i will shoot myself in the foot but one of the great advantages inflation was on our mind we really had to think about it in some way. Most of us as individuals have not thought about inflation and that is exactly what greenspan wanted so why is this good . Because those expectations dont move. As long as you dont abuse it then you have the tradeoff and it is much easier. I dont know exactly what the limit is that people will be more aware which is expectation adjusting to make the job of the central bank not difficult. Five in favor and one not and i shall stop here. [laughter] seventeen. [applause] my job is to make the case for nominal gdp targeting. And also the drawbacks against. But broadly i have gone to make a proposal and make the case and as assigned with some drawbacks. Its credibility, an and they targeted therefore is less useful if its something that is already unable to achieve. You can predict that there will be unable to achieve and you dont get the credibility, so im going to be a little negative here on the inflation targeting. The main point is that full employment. So im a little surprised when i hear how do we think five years later about this. Next time im going to resolve and the first one was incredible the second will be less credible and that applies to raising the target and in my view people speaking both before me in afted after me i think it applies to the price level target. Very elegant. People have to believe it. Thats the good news. I will say if the question is an inflation target it means, it should be transparent in the longterm. But it isnt credibility on it. Point number two and this is the more important question nothing really longterm that the central bank wants to signal its intelligence at the horizon of one to two years as a formal target or guidance for threshold in the bank of england back when is the best economic variable ts are used to signal your intentions shortterm Interest Rates and so on. My claim and assignment is a proposition if the banks want to communicate their intentions at a one to two year horizon it would be more effective if they do praise to that commitment for communication or guidance in terms of nominal gdp rather than inflation. You cant hit it exactly to say the mandate is to do everything it can to get as close as possible as the governor fails then the issue is fired. I was like the fantasy we all had about new zealand in the 90s but anyway, that would be the most extreme. Whether it is inflation or nominal gdp or anything else is not credible. Im going to make a nonthreatening my old proposal. They release the Economic Projections i think in 60, committed by the governors and Bank President s i propose adding nominal gdp in that table. My first choice before the real growth unemployment it gets much less attention and here is the most recent one from december. First is projected change in real gdp in the second is inflation Interest Rates. I propose we add a row for the nominal gdp and even if the members additionally just have to rate of growth of nominal gdp construct that by adding together the forecast for the growth rate and inflation rate, i will go along with that but i prefer to be the first row and get a little attention that it would be signaling that they are starting to Pay Attention to it. Let me slide in metro. Now the main point was the case for the nominal gdp . A little bit of historical background in case people are in favor of it or not familiar with it what the case was when it was first proposed before getting to my main point. It was originally proposed at the time when the target to be had triumphed the bank of japan and england and then a number f economists pointed out that they are not robust. But lots of other people including some in this room did some analysis to make the point. The point was nominal gdp is robust with respectable velocity shots. The target was needlessly destabilizing the shifts in demand for money and automatically by definition it offsets that so that was the strongest case and lots of us were in favor of it. Now, fast forward nominal gdp targeting underwent a revival around 2011, 2012 and circumstances were quite different. Once you get a whole array of people coming out in favor of it, they got a certain amount of attention and around the time he was taking office as governor in the bank of england. There were academic articles, its big in the blogosphere. Its a partial list of people that have written on the case for nominal gdp targeting for several years. Now it is a core level or change and the case in favor of nominal gdp targeting is still more robust with respect you are more likely to be able to live with it than a cpi target. Now its robust and respect to the aggregate supply shop are at the point. These are particularly relevant in the country. It says you have to take the entire shock in terms of the lost output and you cant let it in terms of high inflation. The main point of the big argument of the nominal gdp targeting is an impact of the shift to be automatically divided between some loss of price stability and the outcome objective and it comes closer to what is the ultimate objective that we are seeking. Let me give you an example of how it can get you into trouble and push the authorities to tighten in the face of an adverse shock and thereby needlessly worsening the fall in output. The best example i think is july, 2008. The u. S. Has already gone into recession and the world is sliding into what will be the great recession. All forecasts are working down the estimates of growth. What do they do in july of 2008, they raise Interest Rates. Why do they raise Interest Rates . I think because there was a spike in oil prices and they are concerned about the targets, so this is an example where the movement was in the wrong direction and the nominal gdp target would have given a the right answer. Here is a graph that illustrates the central point. Horizontal axis and vertical is a price level. We respect to be at point a, but we have a supply shock and this is a negative adverse supply shop it creates adverse productivity shock and natural disaster. The Monetary Policy constricts so much the cpi doesnt rise at all indian tiger adverse impact in terms of gdp. Then somewhere close we want to be is the nominal gdp target automatically its called for and divides the supply shock. I should also mention the drawbacks. Of course i would argue its more likely you could hit the nominal gdp target whereas the others had adverse supply shocks. Objection number two, the person in the street doesnt understand nominal gdp. Dont worry its only an increase in the cost. To buil build a dam of nominal p target that you can live with finally got the gdp targets are realized and been kind of a complicated and seems to be a valid callback but its the same at the point of course we cant hit our targets exactly. Price level targeting is close to the nominal targeting. The whole conversation Larry Summers started and that is the issue of why is this a real concerns of these are some of the estimates we have of the natural order equaled a preamp history in the blue line shows the United States an average of three estimates and others i worked on with estimates that come from our colleagues who are using the data to infer from the tips market whether that Market Participants think it is going to be six to ten years from now. As you can see, where he talked about a number of 1 . You can be base see based on tht estimates are running around a quarter of a percentage today. The red line shows the estimates of the model for three other economies as the gdp waited an average for canada and the united kingdom. I think it is actually higher than the estimates that at least these estimates are low and the other important point is they havent moved back up. They are moving back up and i think there is a reason for that. The movements and the rate of if interest not only in the United States all other advanced economies also found that the rate is very low and these are driven by what i think of as Global Factors primarily demographics and people who are living longer than general and population growth dramatically in these economies and the secondbiggest lower activity trends and the increased demand so thesthis of these are longtm sustained fundamental changes. As larry said in the opening remarks they have far less room to cut the Interest Rates that happens at some points o point e question is what to do about this new reality and again im going to talk about the price level targeting. It is a deviance from historically what we think of in the inflation targeting is backs back to 2 over the next few years. It is really in the context of this issue of the low neutral rate so lets just do what i think is the unpleasant arithmetic around inflation targeting so in the good times like we are having today ill get up to 2 goal and in the two times. Once in a while maybe once a decade or a little more frequently will have a recession if it is severe enough and the fact that we had this is despite best efforts of conventional and unconventional policy where he struggled with getting inflation back to the 2 or i itll take longer to get there so now we have the inflation of our history during good times more trying to keep it at 2 and during that recession coming to get long periods of inflation missing the target. Of course weve been experiencing that across almost all economies in the last seven or eight years. So on average, inflation is well below the 2 target. Its just the combination to hit the 2 in good times in the face fact that in bad times it has been under the target and in a timely paper or Larry Summers mentioned in their model they found that the average inflation rate under the standard rule would be eight tenths of a percentage point. You are at the lower bound ten o 20 to 30 of the time. The central think is a cheating this goal by doing its best to achieve them but the second is actually something that is underappreciated in the discussion. That gets to Inflation Expectation and actually make that harder so the two challenges with inflation targeting where they basically say i went in with inflation back to the target is appropriately. It will be below the target taking the job even harder so what is the solution to this, the solution to this problem is to get the average inflation back to 2 so demeaning to undo this bias so it comes from the lower bound constrained during recession. Its a three or 1 target for choosing a target with one or 2 a year over the next 30 years and if we have a period of a severe recession where inflation averages less than 2 . To undo this problem an in the w story is created so the various variations ensure people talk about the nominal income targeting that has this level and there are all different ways to try to achieve this goal and im nothing to say that one is absolutely better than the other but i will say that the notion of assuring people that when they are planning for the future, if you are buying a car or a house, saving for your retirement or your kids education, you have a notion that inflation i understand with inflation on average will be the next ten, 20, 30 years the next horizohorizon buthorizon for bud households think about and that is one of the strengths of the price level target now in terms of counter arguments, it does sound a little scary but youre going to create a recession because you have a runup in inflation and you have to reverse that. Its not nearly as scary as you might think s for a second chart and that is this is a simple calculation. I dont want you to take it too seriously but this is from 2005 to Third Quarter of 2017. The black line is the federal funds rate target. Hearing using an example im not arguing that targeting you have to think about it in this particular way and just trying to illustrate the idea. In the inflation rate the blue line is exactly the same rule john taber laid out using the Unemployment Rate however as a measure of Economic Activity that here i would place the inflation gap in the inflation term on the right side in terms of the deviation from the target with a price level that starts from 2005. Now we want to make two points on this. We did have over inflation in the mid2000 before the recession. Both the role rules have interet rates going up but you can see this as Interest Rates moving up roughly like they did and what the Federal Reserve actually did. Both of these because unemployment skyrocketed and on inflation came down to the policies and i am not putting this down but both of the policies are doing basically the same thing and this is the last place i will end with. Whats critical is the price level targetin targeting the noe are missing on the inflation target roughly year after year and therefore it keeps Interest Rates lower for longer after a very severe recession where it is very low and its basically adding promises and extra stimulus to help guide the economy and guide the economic expansion and bring expansion back and if you can see in this particular example that actually traces that above the bound. I dont see the price level targeting when you have high inflation in the normal 2005 period were particularly now. The last thing i will say and im already over time but this only works committed this change only works if it is a commitment to a longterm change and its not something you do opportunistically the next few years. Whether it is temporary or nominal targeting. It is an important concern in the framework to work as effectively. Thank you. [applause] i think the first thing we want to do is look back and say why are we here and why do we have to think about this target and from years and years i want to draw two of these. The first is the Monetary Policy but are often than we expected. Starting in 200 2007 antonio age where they went through a financial crisis and wiley coyote went over the canyon and then realized that there was a clash. So the fact that its not linear could actually lead to more frequent hits. The second is that the Financial Disruptions could have bigger effects than we expected. Third has been emphasized by john at larry and so forth. Once it is occurring its harder to stimulate the economy and nonconventional tools are less effective than we hoped. Its very hard to get inflation at the level we would like them to be safe to rethink the inflation target. The argument for this is very strong. So with a higher target you have a higher natural Interest Rate with a higher target for inflation conventional Monetary Policy is actually going to have more room in order to stimulate the economy as we have had recently. But there are some serious coins here and im not going to advocate that the first is that its more difficult to stabilize at 4 level rather than the 2 ago anlevel and theres a wholeh of reasons why i think this is the case. Case. They had a beautiful definition of price stability that is similar to what the Supreme Court described as no way you see it. You basically say that its when Economic Agents are not spending a lot of time worrying about inflation. So produce goods with very low cost rather than worrying about financial transactions. The problem here is once you get about Something Like 4 , i dont think that is consistent with the definition. And then 4 why not six and why not eight. He went through this situation in the 1970s. And so, when we think about this you can tolerate four to 5 on inflation and would have simply got before but then why not six and then it was a bad period in terms of Monetary Policy. And in fact another lesson that he learned from the last 20 years is how valuable it is to add expectations that a particular number and indeed this case the Central Banks have been successful and that was extremely important but also of Central Banks like the Federal Reserve to be extremely aggressive during the crisis for expansionary Monetary Policy in order to get out of the crisis and not worry that Inflation Expectations were going to spiral out of control and get to a problem so it gained more in the Federal Reserve and the others are there are problems in the long run you have to worry about some even though having high your inflation may have some welfare costs in the short run that isnt a big deal to think thabutthink that this haps continually, this actually starts building up and becomes serious numbers, so they may be smaller in any given year is actually over time, they become very substantial. So, when i look at this night view is should we raise the target of two above 2 think the answer is no and this is a cost and benefit calculation raising it to 4 is outweighs the benefits. So, how about we seek to target and i would argue that the Monetary Policy showed at times and now is the time, it should think about overshooting the goal and so the problem here is the inflation targeting and this is something john mentioned, it is and what we call history dependent. Treat bygones as bygones. In this famous toe in the want to have the policy in which when you have undershirts of the target you want to have overshoot the target so that on average its going to be at the levealevel that is consistent wh your goals. If you think about the price level targeting is one of these policies and actually produces less output variance so a way to think about why it works well as when yoiswhen you get the negatd shot in the price level below the target path which is a 2 growth of the price level at a steady rate, then what happens is you have to get back up to the target, the price level target and he wont have to fight your inflation. The inflation then takes the transportation which provides the stimulus you want in that situation. This is very important but its valuable even when you dont. Another similar policy is the gdp target which jeff is talking about and has even more desirable characteristics. They say that it shouldnt just be in terms of the price level but also should be in terms of where you are at the rate of output and so what that does is adjust the price level target and have to be not too far away from the gdp target. I want to argue there are some challenges to both price level targeting and nominal gdp targeting and its one of the reasons even though they didnt go to it i think it is much harder to explain. Its always at the same level and has another path. Its harder to explain so when is the communications challenge into the second issue is hard to explain when inflation temporarily rises above 2 people might worry you are not living with 2 inflation goal. The nominal gdp target has the problems just mentioned in terms of people might not know which level it is as an issue that i think more importantly is its hard to know what the nominal gdp level should be. Theres a lot of debate about the potential should be the natural rate of unemployment. And in fact when there are periods that there were mistakes made on this there were big mistakes made in the Monetary Policy for the example. They have inflation is and i would argue that we should think of doing this is to think about inflation targets not in terms s of shooting for 2 two years from now that the average should be 2 over a period. And then they made a proposal about this. I actually made this proposal a year ago. Great minds think alike sometimes i wonder if we just worked together to much, so that could be a problem as well. The idea is. One suggestion is actually very much in this kind of framework and there are subtleties that whether you want to do one or the other later. Inflation is running about 1. 5 and you have a 2 target, that means you have to do 2. 5 for a while, so the desirability is when you get past the history dependent we want which is the expectations would rise a temporary period of time to make the more expansionary effect. But even if he worry about what jeff is worried about some of that might not have been in the channel which im not going to agree with what i think it is a serious issue. One of the key point is even if it is and work it is still telling you you want to be more expansionary than you otherwise would he choose the right placee because of him that since it had a desirable characteristic. By the way, the reserve bank of australia in a little partial to them but in fact this kind of policy is exactly the kind of policy the reserve bank has do done. I was there when they were actually formulating this but what they have done is a target of two to 3 and they are shooting at 3 on average over the Business Cycle. The average inflation the last 25 years of just 2. 7 or 2. 5 and havent had a recession in 25 years. And indeed if you take this kind of approach that is similar, he looked at the case of what should we do and there was a 2. 5 inflation goal for short period time it would have produced better outcomes. So they should commit to an average of 2 but it could be over the Business Cycle and another approach and its the modification of the Federal Reserve. So you keep those expectations and to me that this sort of a way in the best of all rolled ws into a lot of the issues john and jeff have raised a doing it in a way that is practically more practical and also something that would have a very good outcome. So thank you very much. [applause] now im going to put this all in context. First, thanks to the center for organizing this. I would first say i agree entirely how this is very importanimportant and i know thl reserves are thinking about it and as i strongly support the effort to do that, i think we do have to keep in mind its like the joke about how you get a temporary we dont start from here we are not starting with a blank slate. We do have a system of framework which theres a tremendous amount of investment in the sense of communication and years of experience and anchoring expectations around 2 inflation target so the argument that says what do we do if we start from scratch is interesting for academics but maybe not the most relevant question starting from where we are in particular so it might be higher than two given what we know now that if it is 2. 2 i dont think that justifies the framework. To be Artificial Intelligence will start having the benefits we hope for which we are locked into a higher inflation target in perpetuity how do we respond to the next change in the environment. I noticed they havent actually changed their framework. In terms of the individual approaches, the Federal Reserve isnt going to adopt 4 , its not going to happen to the theoretical perspective first of all it is an inefficient way to deal with the problem and it is inefficient first because it gets you high inflation all the time and when you were at the lower bound it doesnt give you any particular additional push to get out of that field so that is the theoretical approach. The u. S. Public is not going to be very open to the four or 5 inflation target, and in particular i do worry that some of the people that are pushing this, so many are pro expansionist. They might find if they opened n thithey openedus up to much thep with a change in the wall that t eliminates the end when it goal rather than the stability goals and what youre hoping for. In terms of the options on the table it to go get some. Price level targeting that has the advantage that maintains price stability is over time and lower variance of her time with more information about where the inflation of prices will be in ten years at the price level inflation target. In many ways it is similar to the framework to talk about average inflation rate over the period. I do think that there are problems associated with undoing the price level shocks. My own preference as it has already been alluded to at the zero bound specifically when theres a deficit of inflation over the period Interest Rates are at or close to zero than the deficit becomes an additional input into the policy debate and discussion. It is anticipated and understood in advance that gives greater policy stimulus and greater impact even going into the zero low ground period. Now, one objection that was a generic objection to changing the inflation target is the dont believe we can change expectations to get people to leave some kind of different policy process. I realize it is difficult to see in for example the case in japan thats hard to get expectations changed which is why any change in the Current System is going to be complicated but i think with price level targeting, the focus is not necessarily on getting the average person in the streets to inspect higher inflation coming out of the recession but rather, the main audience is the Financial Market and we have seen from the recent experience that when they announced they are going to keep it for longer, the market reacts to that. So it may not be something the average person or firm will respond to that if you get the additional stimulus. To explain why it is worth talking about, one argument to be heard from larry. People will notice that the second argument i think came from jeff that he compared the gdp targeting to the strict inflation targeting in fact inflation targeting is flexible and as stated in the policy principles the time it takes to return depends on the state of the economy. And so, the inflation target typically is a shock as you move back to the target. I think the reason the targeting is worth looking at is because it actually finds differences in appearance to very similar price level targeting as john mentioned, some in particular the growth rate is similar to inflation targeting and the rate of gdp is very similar to price level targeting. Your targeting inflation but because they were also looking at gdp growth, you are allowing. So it is to say inflation targeting and one argument is tt is made is the nominal gdp targeting requires a information. You dont have to know the natural rate of unemployment to deal with the target on the other hand you have to nominal gdp is and thats produced only in a noisy way so that is a balance you have to make. Another argument is the nominal gdp targeting is more or less judgmental in the sense that it sort of builtin flexible response to the changes in gdp whereas inflation targeting isnt quite so clear how it will respond. If you have a fixed 6 target with gdp growth that goes to to it automatically raises the target to four. Is that good or bad . They tend to be similar and have a tendency to offset the nominal rate and the one problem with that though is you could get a situation at oak grove and then it would be targeting high inflation. That isnt popular or sustainable. So anyway, my bottom line is that the various things of the greatest things suggested, i think the various are the most appealing to you by recognizing the recommended and continue to look at the nominal gdp measur measures. So making the hypothetical case of. The severity of the cost where it is. It does as normal so you get it down in a reasonable amount of time given the recession. It may occur again and the estimates of inflation are from forecasters and inflation swaps. So maybe what i am arguing is the situation in the current status quo isnt quite as dire as it was per trade and the other argument i would make is that weve learned from this experience how to signal them more effectively. Its a statement about how they will attack the next period and be explicit about in general terms how they could use for guidance what combination of criteria to provide not only some clarity. They would anticipate how to react even better before. Its laid out in an informal way how it expects to respond to the zero lower bound, that might make the probability of hitting the zero or lower bound over. Thanks. [applause] im going to tell all of you do need to put a microphone on when you speak and its that thing in the middle that looks like a person talking with things coming out, very odd looking. Okay. That was so interesting. I want to start with a clarification. When people talk about these different targets were different frameworks we are talking for the price level or the higher inflation. It just affects the price but keeps the unemployment. But the nominal gdp would combine them is that the right way to think of it so we arent giving up on the unemployment piece . A number of people when they hear the price level targeting they think of the first generation of inflation where there is a unit or one goal of inflation. The way that i described it in my picture is on one way to hava dual mandate maximum employment and price stability so you are managing both as well on the equal standing. I think the key is the targeting and this is the characterization of how to deal with the shocks. Its not the way that the targeting is done and if you think about it, we basically try to optimize by minimizing the output gaps and inflation gaps. And indeed, the way of talking about and communicating the framework is basically another way of saying the same. I wasnt sure when you talk d about the nominal gdp. When you talked about the growth rate for the levels. It is a choice to be made and i think the issues are nominal. In the case of nominal gdp whether you are doing terms of levels or the rate of change i understand the argument is in favor of the level and a way of looking in your favor of self stabilizing the disadvantage is and what if somebody actually believes it, so if i could add a planned a number of people have said its no big deal really if inflation targeting. They are in favor of it, i am in favor of it and then you are clear about what th the longrun inflationary target is and then we have a discussion about whether to raise or lower it. In one to two years most Central Banks still after all the trouble want to be more transparent and signal their intention even if it is just for the Forward Guidance for threshold rather than setting the formal target and they say the inflation target allows to take into account the output of unemployment. To give that level of salience and two other people know how thats thinking of the one to two year horizon. Lets talk about the role of expectations. Although he wanted to give able to give more room as we desperately need and then there are two ways. The first is to raise inflation and make it simple for you are going to change the target and the less likely to the way we used to operate and if we say that is too costly and we can do something sort of more subtle which is to say we are not going to raise the longrun target, but we will change the Inflation Expectations kind of overtime. I guess also the way this would help with with a dozen growth w round is to say we are not going to start off necessarily with a higher nominal Interest Rate, but that somehow become an expectation and the lower bound was not hurt. Is that the right way to think about the sort of difference, one that you both get out of this euro and lower bound and number two, you would manage the benefit of having higher target without the cost . Whether it should be zero is in the expectation so if you announce it is going to be inflation what we learned is does it work, how does it work. Then just where we need it. The difference between having high inflation all the time and then where you need it for example exiting from the lower bound period has two benefits, one is it makes to market more accommodating because the Interest Rates are easier for longer and then it overs the real Interest Rate as well. A totally legitimate question is can this change over time and is that feasible and i guess my answer is that while it may not be the case again as i said in my remarks that the average person will understand the subtleties and feed them into their decisionmaking they understand the market will and that would be enough to get some benefit from this approach. Can i go back. Hopefully that even if you dont get the Interest Rates for longer you argue that room to do this is quite delicate and that will make a whole other difference and you go down even more so yes if it doesnt work it is very weak. Supposed to get a couple of things you can reduce on the short rate and then the rule of thumb is if takes 275 basis points for the reduction in the ten year yield so we are inverting that and its worth 300 basis points and it all adds up to the amount of total production that you need if you can get the rate from 150 basis points down to 50 that is quite an additional stimulus. Arguing getting there without that and the additional commitment for the short rate some of the additional commitment to do it for another five years after a. Lets me keep on the question of the promise to raise inflation. Is there a change people sometimes describe this as a rule that would say youre going to commit yourself to doing something that you might not want to do or is it something that you think you were just changing the reaction function and people would be happy to do it. One of the things said that somehow by raising the rates right now, they have kind of showed what they like to do is not keep the commitment and say we are going to overshoot. Maybe that is their current framework. What do you think . That last thing is critical. We review it every january and its basically a flexible inflation target that states very explicitly our goal is exps obviously to balance the dual mandate objectives and specifically bring inflation back to its target so what we are carrying out in my view is a policy that the goal is to get back to 2 over the next couple of years while managing the dual mandate objectives of this is actually a critical issue in terms of thinking about the situation may be like what the longterm framework and let me give you an example. It is a Market Participant where basically it is about how the reaction function works when you are at the zero lower bound and they looked at history and send the economy generally recovers n a certain way and lowers rates for certain period of time and over the next couple of years is back to normal levels so throughout the period back to august of 2011, Market Participants were understanding how we are behaving in the circumstances were expecting us to raise the rates basically in 12 to 18 months despite lots of languaglanguage and the statemed speeches we were going to keep Interest Rates low for quite some time for explicit guidance to introduce the shift in expectations of markets and has said what mattered was that the markets understood what he said for the treasury it fell by 20 basis points roughly on that announcement and we thought with our future guidance segment there was a significant effect on the Financial Condition and the big advantage to me on the price but for targeting or version of that or some variation of that is that it would be built into the framework, but expectation that we would have lower for longer and keep Interest Rates low but only to help the economy recover but achieve the price level target wouldnt be something that we need to put into the statements or struggle wit wereh how to best do this. It has the output tab in the inflation tab. You could just do that with the price so that issue is completely separate and ive gone on reference that i do not think we should adopt some kind of rules like the taylor rule but i think its a completely different issue than what we are discussing here. [laughter] will you push that other button. Im pushing it. Accountability you know something rick said at the end of his presentation, its absolutely critical. Getting the nominal anchors the most important part of the Monetary Policy and thats why im arguing for Something Like that because i think that will help anchor inflation and expectation with this lower balance. From an accountability point of view its not that complicated. He obviously with the dual mandate you can plot the price level target and look at where the price level is relative to that target and of course go through the normal explanations of why a price level is higher and lower than the target on what you can do to achieve it. I have to dont think its more difficult to be targeted that way to get a lovely talk about where you are relative to that level and how youd test will achieve your goals for overtime. In a collectible way like inflation target you dont try to get back to your target for months, weeks or a few years to best manage your dual object this. Im i go back to something that you mentioned which is the symmetry of the price target which is on one side. Inflation has been too low. On the other side when the economy is doing fine from excessive inflation in the past you have to slow it down because your promise. My impression is that would never happen. Its interesting the American Economic association which means it took place in philadelphia Christine Roemer gave a presentation. Quite honestly the same kind of issue had arise there and a few historical episodes where they looked at for a nominal gdp and i would say price level target would have the same result would have told you to have the tighter policies and examples were the late 90s and the mid2000. They made the argument may be policy could have been tighter in those areas and based on their analysis it would necessarily have been a bad thing. As i showed in my chart that showed the price level target we did run a few years about the target persistently before the recession and the price level target called for slightly more tighter policy but not dramatically. You were talking about how the target audience is the market so communications are in the markets and not main street but i wonder if you worry about overshooting and whether that would be the case and whether you would start hearing from the industry that inflation is running really high and they are just responding so what is the danger of people who dont understand the complicated rule that they would misinterpret it and they would have implications for the fed. Thats why think the issue about communication is a key element to this and if you look at basically our position is very similar and its really about the medication. Price level targets is not going to be understandable to the public but instead of saying inflation target we have an average inflation target that is easy to communicate. Its a change in communication and it changing your function. Its not just communication because thats what the fed is already doing. Its having to change with the fed is doing and communicating it. Im going to turn to the audience in a few minutes but id like to ask one final question which is we are worried about next session and it could happen at any time and yet we think about changing the framework is a hot topic. What is the timing for this kind of thing and how long can we wait because now we feel like there is too much political pressure on the feds and how do we go about getting to a place where you could make a change . Its interesting that everybody here basically wants to make a change. Everybody feels vulnerable for the next recession. How do we get to that . How do we develop that politically . I can speak freely. Just based on my experience we have a new incoming chairman and im sure somewhere next year i would guess in the first half of the year the chairman will assign a Communications Committee to work on this and staff support. There will probably be a discussion in a year or so but at some point im just guessing based on my past experience somewhere and 2019 there will be some pretty serious discussions. Those who are interested we had similar discussions at the foc in 2011 looking at the grammar to deal with the problems that john was talking about. At that time the general feeling was in the middle of a recession was not the right time for making those kinds of changes but i imagine this will come out in a serious debate in the next year to 18 months. Again it is a big step. Whether the foc would announce something and begin to engage with politicians and the public and so on. Im not sure about that and within a reasonable time the staff can evaluating. I really should have said my disclaimer. I actually think its an important part of the process. I think whether conferences or seminars or other kind of forums that we can have where people in the private sector academics and experts along with central bankers is an important part of that to think through these issues. I agree with everybody that you dont want to jump to a new framework without fully thinking through all the risks and all the possibilities and situations situations. Its not something you want to do every couple of years. I also want to point out that this has international ramifications. All the issues we are talking about in terms of the low two neutral Interest Rates and other developments that led to the recession applying to all the other advanced economies and i would argue an time we will start applying more to the emerging Market Countries as well. I think this is an issue not only for us sitting here in washington or in the u. S. But for Central Banks around the world. We also know from the work these low Digital Industries have important vocations for the International Spillover and international effects of Monetary Policy actions. We really want to think very carefully about that. To build on that big emerging Market Countries are dealing with these issues. Some of them have the album with inflation to high wear back in the 80s it was hard to keep inflation down. And as i mentioned they have far more in the way of supply shops and weather disasters, natural disasters. Thats partly my case for a nominal gdp. When we started this all them models were expectations to whether the goal was to get inflation down and it used to be in the 80s or up our models assume a central banker or failing that that it would work. Expectations throughout the economy would be transformed and you could get inflation up or down. I dont think the discussion among monetary economist is quite adequately and allen analyze. They really meant it about the 2 target and they did not achieve it. I think we need to take that into account more and take any of these very clever proposals including nominal gdp that rings me to a concern that ben times ben had which is if you open up the process it would be politicized. I gave her what we have already got. Just a little bit on this issue, i agree that its an issue particularly the example of japan and how difficult this to get Inflation Expectations up is very relevant and one of the issues is when you choose one of these policies which if you try to overshoot the actual policy changes and the reactions change. That means it will likely lead to higher inflation when they wanted and that in itself produces good results. Its still one of the great successes of Central Banks has been the inflation of 2 and one of the results of that is inflation did not get into deflation during the great recession. This man is one of my heroes. For many reasons by the way. [laughter] but then is going to go down in history as somebody who actually made sure collations stayed accurate. That is what we were trying to do which is make sure people didnt go the route of japan. In that sense policies which tend to lead you to anger that and in fact history will have benefits in that direction to do exactly what would want it to. Telecine you are please. I will take a few of them to see who wants to answer them. Two quick questions particularly for john. The first is what a price level target be helpful in managing expectations in normal times under conditions of a flat curve where you may have long periods away from her inflation target and the second is when you have these rules to commit to staying how would you integrate that with Financial Stability . Are we going to take a bunch first . Also for John Williams and your previous conversation at a price level targeting ruin you had 2005 as the start date so obviously the start date is critical in terms of what policies we tried now so my question number one how hard would it be to find a consensus on the appropriate start data number to who gets to decide, the foc, Committee Like ben bernanke was talking about, just how you would see that whole process . A question for everyone. Why dont we go back cbi like other countries will. It changed about 80 years ago and we can always go back. The cpi level i think we are not having enough time. Thank you. Just a quick answer. Cpi runs a quarter percentage point higher. I definitely would not say lets switch to a 2 cpi target at this time. We have chosen the broadest measure of consumption prior to the broadest index. Its a good measure of inflation inflation. Let me answer quickly the question about my charge. Its the technical part of the substantive part to the technical part when is it jury that picture for presentation early last year 2000 by the u. S. Economy was roughly at full employment running at 2 at that point so it seemed like a neutral place to start. Im assuming a 5 rate of unemployment and basic way thats why i chose that. If you are thinking of any of these procedures a nominal price level target that would be one of the considerations. What is the right level to started at and i think that gets back to your earlier question about what is the right timing of the debate . The right timing of this debate i think is now. Economy has fully recovered from the recession and the economy is closest to the second longest expansion in history and im hopeful we will hit our inflation target. Thats a good mutual starting point to think about. One of the things thats really difficult and this is something bad has already said that if you are in the middle of the deep recession or difficult situation thinking about changing the strategy does want to stimulate the economy. Im more optimistic about inflation and so i think now we can really focus on longerterm conditions. Switching to the cpi target you want a higher target and not a lower target. A good question. One would be the stability price and we use regulatory policy that produced it make any worse than times than having four times four guidance . And not sure that it does but its clearly an issue we need to think about. The other question related to that is what about if Inflation Expectations are completely adaptive and you have the destabilizing patterns the only way to study that in the absence of Actual Experience would be some simulations and Model Analysis that takes into account those possibilities and tries to look at the range of outcomes. The ideal thing new zealand introduced price level targeting for three or four years so we could all find out how works and it would be a tremendous benefit to the rest of the world. I tried that in new zealand they said we did our part. Its someone elses turn. Maybe canada. I found todays discussion extremely informative. We started thinking about the next inflation targeting rule which is in 2021 but my question is on today most of the discussion is related to the events of the frequency which limits where Central Banks but what does that mean we should tackle it instead of thinking about alternative monetary framework and thinking about the ways to eliminate the central bank issue. Thank you. A question for everyone. One of the things we havent discussed. Can you give your name and where you are from. One of the things we havent discussed is inflation is probably outside of the purview of the central bank. For example bankers would control so i think the question is is there consideration that an inflation target can be lower instead of higher and some of the structure forces of inflation and there has been something thats been suggested by the claudia barro that it should be lower than 2 and 2 or 3 . Thank you. It came up earlier to the issue of whether we would want to open up congressional legislation and how that might lead to things we dont like but if it does happen i guess id like to hear what panelists think about possible changes and the previous question are just now mentioned possibly doing things that would have removed the lower negative Interest Rates perhaps. A couple of other thoughts which id be interested in hearing. One would be the fed has a lot less ability to buy assets and other Central Banks. Maybe the normal basket of assets of central bank should be the Market Basket of all assets in the economy and another possibility would be perhaps under limited circumstances when you are at the zero balance in the treasury secretary agrees you can. We will answer that. There are two ways to think about this. One way is to be negative and the other is to increase it in neutral ways and that goes back why they safe rates are so low. There are two ways to think about it. One is that steep forces like demographics are difficult to do anything and the other is safe assets hypothesis. If we just satisfy that demand we would get a higher equilibrium. Something can be done on the supply of safe assets and that would go a long way decrease. Theres always this issue about when you have undershot at target and should you lower it and this has come up in an evaluation of the swedish Monetary Policy. That was one of the recommendations. I think thats the worst thing you can possibly do in the reason is to get exact lease the wrong kind of classification. This is one of the reasons i didnt like comfort zones. To bring a little bit of the addition to the discussion of Monetary Policy but what happens if you have a fall in inflation and you say im going to lower the inflation target that has exactly the opposite effect of the inflation education dynamic of the price level target. Any negative shot is going to propagate even more. The academic literature this has been discussed as one of the big robbins that has occurred in terms of the Great Depression where he had negative demand shocks and he had deflation set in. That leads to disaster. I know this issue has been raised but when you think about the theory of it its the worst thing you could pop up possibly do in that situation. So fundamental problems in some sort of radical solutions have been suggested like abolishing cash altogether. Have to return to the question someone asked in the first session. What about central policy . And are the conditions were Monetary Policy is not powerless but its really tough fiscal policy is the most effective. Larry said its very hard. He did it and he learned there were no shovelready projects and the fastest projects took a year or two years or three years but did we learn that would have been great . I think thats not so hard. More generally it seems to me and my crew which is similar to some of the other peoples careers here we have forgotten the most important thing we learned in introductory macroeconomics which is you at least want to try in fiscal policy to be countercyclical. The last thing you want is for it to be procyclical. What we have in this country and some other country is pro cyclical policy or some politicians thinking that when times are good and the economy is booming thats the time for tax cuts and only in recession realize that the problem. I think we economist me to talk more about the desire of that stability systematically of having procyclical policy and if we cant get it exactly right and the payoff has to be greater than some of the second order things we are talking about. One quick comment. Theres an issue which you talked about, the argument for why you want to higher inflation targets. The same issue comes up with the fiscal impact. You in fact are doing countercyclical policies. When times are good you are doing more savings than it gives you capacity to do a lot. Actually theres a recent paper on that where they list the countries that had more fiscal capacity and they did a of a lot better during the great recession. This is very important and obviously very current. Rob martin, eds. All of the policies that we talked about rely to some extent or another the Central Banks having a great influence over leadership. Given most Central Banks have been a target for some. Mcadoo we have the sia period where Central Banks consistently hit those targets before adopting a new measure . I fear a change in having even a greater loss of credibility. Im going to stop with that question because we dont have that much time its a great question. Do we actually have a way of achieving any of these rules . Can i respond to this . Id like to get back to an earlier question. In 2,112,012 it might have been a difficult time to talk about any of the issues we are talking about because it seems like you are struggling just to debate this. Now i think we have gotten a full recovery and we expect inflation to be moving to target so it is a better time at least for the United States to have this discussion. I will push back on this premise that we lack credibility in the United States and our inflation target. A really great speech about the inflation experienced during the recession during her cover and highlighted up until 2016 roughly the shortfall inflation was exactly what our model such as they are we had a period where the implement rate was very high. We had them other fact theres was obviously affect inflation. Inflation target was a direct consequence. To me its not a sign of the failure to achieve our inflation target but they were flexion of getting the economy back on track. Inflation dipped after writing at almost 2 early in the year. Of course thats a reality that inflation moves up or down for various factors. The critical part critical part for me is not in terms of the credibility during the recession. I think this gets back price level targeting that when you have an extended period you are committed and going to carry out inflation. I dont think its that difficult of a task to accomplish. [applause] we are going to take a 15 minute coffee break and we will reassemble it 3 30 prepares coffee out this way and restrooms out that way. Please join us and get teen