Transcripts For CSPAN3 Monetary Policy And Inflation Target 20180108

For a conversation on Monetary Policy and the possibility of inflation in the u. S. Economy. Former Federal Reserve chair bernanke and Larry Summers speaking. Live coverage just getting underway. Will undoubted lly weighing. Thats the fun. We think that the question of rethinking the two Percent Inflation target is one of the most important questions facing Monetary Policy makers at the moment. You might say the backward looking question that we need to think about which we are thinking about is how did unconventional policy really work and should unconventional policy really be considered conventional policy. We look forward i think you have to argue that one of the biggest questions now is whether given everything we know whether a two Percent Inflation target framework is the right one for Monetary Policy. After all, when it was conceived nobody anticipated we would have so many years of trying to get inflation up to two percent and nor did we think that the long run equilibrium Interest Rate would be so low that in the last federal open Market Committee survey of Economic Projections the members said that they expect long run rate to be 2. 8 to 3 which means there is not a lot of room to lower rates below 0 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 to have because if you Start Talking about this you frighten the markets and bad things would happen so you just dont talk about it in public. I think we were right that this is an important issue. We were wrong that members are afraid to talk about it. The minutes of the meeting suggest that it has been discussed and a number of Regional Fed Bank president s have raised it. But i think that this is not a decision that can be left to Federal Reserve policy makers 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. This is our attempt to try to explain what the issues are, what the choices are, what the pros and cons are for the broader audience. We will try to synthesize this at the end. We have a very crowded schedule which we are extremely pleased about. It is hard to imagine you could have assembled a better group of people to discuss these issues. Im making a public plea to our speakers which is try and stick to our time schedule so we can get a fair shot. We will start with a conversation with Larry Summers who will set the scene and then my colleague will come up here and introduce a panel that we will have to discuss the alternatives. So with that, Larry Summers. My job at a conference like this in a moment when i am not in government is to surely be provocative and hopefully be sound. My propositions are two. One, first proposition, our current framework is likely to involve unnecessary costs in lost output on the order of a trillion dollars 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 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 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 to think about the Weather Bureau that when they keep being revised in one direction there is positive 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 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 hard, obviously, that is 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 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 under statement to the risks Going Forward. That case would emphasize that normal growth is now 2 rather than 3. 5 and 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 that is therefore more at risk of financial disturbance. A case for more optimism would be that 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 less tangible 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 nomally by five Percentage Points. 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 five percent strikes me as if anything slightly on the low side. If you look at nominal rates you conclude a five percent reduction is necessary. If you look at real rates you similarly conclude that about a five percent reduction in rates is necessary. You can see where this is going. Five is substantially more than two to three. So 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 a risk of further decline, this effect is, of course, magnified. These conclusions are not very far from those reached in a much more elaborate way by Kylie Roberts concluding a 30 to 40 that 30 to 40 of the time we will be at the bound. If you assume once every seven years we will be in recession and assume that once we get into recession rates will be constrained by the zero lower bound for three years, one gets that we will be at the zero lower bound about 30 of the time given our current framework. Observation four. If the expected output losses are large. Roberts estimate an output loss above one percent 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 of a back of the envelope approach. I said suppose when we get into one of these episodes and we are constrained for three years about 40 as long as we were constrained after the 2008 crisis, that well lose one percent of gdp the first year relative to where we would have been, two percent of gdp the next year and one percent of gdp in the last year. If you take that number you get a loss of about four percent of gdp once a decade. That works out to about a trillion dollars over the next decade or 100 billion a year. Calculation can be wrong if recessions were more frequent or a spiral development. 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 could this calculation be way off . I have 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 necessary when you have a recession. The main challenge seems a 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 none theless. That is what janet yellen tried to argue in her speech in 2016. I am far from convinced and i would make these points. First, starting ot2. 5 ten year rates. 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 fed funds rate and nobody does anything else, the ten year rate will find its way down to 1. 5 or in that range. And it seems to me quite questionable how much extra stimulus would be developed by any further reduction below 1. 5 Percentage Points that argument applies with respect to any monetary device that might be developed. With respect to quantitative easing i would note that there is less room now than there was previously, that it is far from clear in retrospect that it is as effective once periods of major iliquidity are removed as is often supposed. As ben has acknowledged it doesnt really work in theory and 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 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 there is an induced short supply of treasury debt. So i am completely unconvinced that qe can be our salvation next time around. 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 two percent, the fact that the fed is not willing to predict inflation above two percent at any moment even a hypothetical moment of the tenth year of recovery with an Unemployment Rate of four percent, must be under cutting whatever credibility might previously have attached to the idea that a Federal Reserve would be willing to live with substantially super two Percent 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 the political process and the way the political process responded to the aftermath of the recovery act suggests 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 criteria for choosing a monetary framework when we next choose a framework should be that it is a framework that con templates enough room to respond to a recession meaning nominal Interest Rates in the range of five percent in normal times. Whether that is achieved through changing conventions on how one permits above target 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 five percent 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 slightly more than marginally higher inflation, but if i am right or if the trend towards a declining neutral real rate continues and we ignore it we will put ourselves as risk of very 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. [ applause [ applause ] thank you, larry. I will ask one question and then we will take a few questions from the audience. So 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 race . Which one would you choose . I really wanted to emphasize that something that would have a normal Interest Rate of five percent is much more important to me than the tactical choices. If i had to choose one, i would choose a nominal gdp target of five percent to six percent. I would make that choice because it would atin wait the issues around explicitly announcing a higher inflation target which i think are a little problemityic 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 productivity growth which is relevant for the zero floor on wages. 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 acknowledgment by the central bank of an objective of super two Percent Inflation in the late stage of an expansion 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 two Percent 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 two Percent Inflation with not a single dot above two Percent Inflation on forecasts assumed continued expansion with the claim of being symmetric about the two Percent Inflation mandate. I should have noted people are welcome to stand in the back if you like. In the room just across the hallway we have a big screen and you can sit down if you like. Anybody who wants a seat im going to take a couple of questions and let larry respond. Roberto. There is a mic 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. All of this discussion assumes that the neutral rate will stay low. Is there anything in your view that can be implemented that changes that . Thank you. Tech another one. Steve . Larry, do you envision any fiscal response. 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. Please tell us who you are. Patrick lawler. Our experience with inflation in the im guessing three percent to four percent 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 swings in what kinds of things Monetary Policy is expected to respond to . Larry, three good questions. Answer them in the order you like. All questions in 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 three percent to four percent range and seem to me to remain in control. Furthermore, i think that there is a natural corrective in the form of intermittent recessions which we tend to bring inflation down. I can 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 evechbt that characterizes what is going to take place Going Forward. I dont have that as a concern at the level of the trillion dollars a decade at least that i think we are putting at risk from this problem. Steve, if we really could work Counter Cyclical stabilization policy well in our political system that would attenuate somewhat the arguments but it is actually a pretty complicated business even if you leave aside the infirmities of our political system. What is the instrument of the Counter Cyclical stabilization going to be . It turns out to have it be i live this designing the economic recovery act. It just turns out to be very difficult to turn spending on and off on the spending side. If you insist on developing back logs of Infrastructure Projects you will 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 better part of an afternoon trying to figure out how to give money to the nih in a useful way which they can only spend in the next two to three years. It turns out to be very hard to do. If you rely on the tax side there is a question as to how high the marginal propencity 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 somewhat problematic instrument. On the question of the neutral real rate, 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 of space per lawyer. Nobody wants malls anymore because there is eshopping. Startups used to require 5 million of capital. Now they require 500,000 of capital. Our technology companies, apple and google, have as their Central Business problem what to do with all of their cash. And how to disperse all their cash. An environment of that kind seems to me is an environment that will have structurally low real Interest Rates. Look, its a basic problem, how do you extrapolate the time series three, two, one . One answer is you extrapolate it to zero. Another answer is you extrapolate it to one because stuff is a random walk. Another answer is you extrapolate it to two because stuff mean reverts and another answer is you extrapolate it to three because it reverts sort of fast and it is very hard to know what the answer is. But i look at the downward trend in almost any proxy for the real Interest Rate in almost any country over 25 years and im at least as worried that the neutral real rate is going to fall as i am of the belief that it is going of the belief that it is going to rise. And i think you have to take the fact that if you look at the index bond market it is telling you that in neither the United States nor europe nor japan is there an expectation that the two Percent Inflation target will be attained over a decade as suggesting that there is substantial doubt about the capacity of policy to generate adequate stimulus. So it seems to me that if anything the Kylie Roberts assumption of a one percent neutral real rate is way too high as a certainty equivalent estimate of what the real rate actually is and how you should calculate it, recognizing that if youre too high thats a really serious problem and if youre too low thats a much less serious problem. Thank you very much, larry. Thank all of you. I want to introduce the policy director of the center who came to us from the Federal Reserve and has spent much of her time here teaching me and learning what the hell they do at the Federal Reserve on Monetary Policy. That is true. So larry dave gave us a great introduction for the next panel making a case for why we are talking about alternatives. We will get into the nittygritty. If you want to do something what would you do and why. We have actually asked people to we have assigned them tasks and said please tell us pros and cons of each of the following. We have an amazing panel. Let me tell you who is coming. First one is olivia from peterson going to talk about the pros and cons of raising inflation target. Then Jeff Franklin from harvard will talk about the case for nominal gdp targeting. John williams is going to talk about the advantages and disadvantages of price level target. And then going to talk about why we might want to stick with the current framework and perhaps tweak it a bit. Ben bernanke will respond to all of them. They will come up and do their thing and sit back down. When you are all finished we will have a conversation. Thank you very much. So given the task of defending the case for higher inflation target rate is what im going to try to do. Im going to make six points. The first one is that the two percent target is a precise estimate, comes out of nowhere in terms of coming out of an exercise is a very nice survey who has looked at 161 papers on the optimal inflation rate. Of the 106 which have guts to give a number, 33 give a negative number. These are the ones which go the freedman route and ignore. 15 say 0 to 2. Nine say 2 to 6. That gives a sense of what you get when you try to do it. If you look at the 161 studies it looks like none of them comes close to capturing what we think are the many benefits and costs of inflation. If you take the classic in that respect its very hard to formalize them. Most of the formal studies really dont do that. The worst one is the socalled model in which welfare cost of inflation i think is just not what it is. We have to keep this in mind. Two percent is an important number but not the result of the consistent studies. The second point is a point that larry made which is whatever rates you thought was optimal in 2006 you have to revise it up. The first reason is that the neutral rate has decreased and again we just had a discussion. There is a possibility that it stays very low or goes lower. Thats the branch that we have to care about. The other is that we basically know that can be large in deep recessions and you need to use something very strongly. Even if two percent was the exact number it cannot be the right number today. It has to be a high number. The question is what do we do next . It seems from a conceptual point of view the right answer is negative nominal rates. In that respect i think it will come. I think we move into the it will make it much easier to have it and cash will largely disappear. You might be able to do keep cash but its going to become less and less convenient and therefore it will eventually be the solution if i were to think about where we are in ten years i suspect that is the right way to do it and will be the feasible way to do it. Not yet so we have to think about what we do before. So the next step is to say sometimes we need inflation because we need large negative real rates and the nominal rate is at zero so lets try to generate inflation when we need it rather than all the time. All the time where if you just have it when you need it then it is much better if you can. So these are revised schemes which try to convince people that when inflation is low then you are basically going to have more inflation later. It can be price level targeting. It can be the valuation that ben has developed that comes from a few months ago which can be a price level targeting. It does it when it is really needed on one side and not on the other. And i think like that rather negative, rather pessimistic about the ability of moving expectations in that way when you need them. If i read the japanese experience is that it is very hard to meet expectations just when you need them. If you could that would be a solution. I dont think it is. So this was the fourth point. The fifth point is what is next . What is next is higher inflation. And i have no doubt that we can get there. We just have to overheat the economy enough and get to whatever number, four percent or five percent. What are the costs of four percent . I really dont see the cost of four percent as being much higher than the cost of two percent. Most of the cost in practice have to do with distortions from the fact that the tax system and transfer system is not indexed. I think indexing many of the aspects of the tax system would get rid of most of the distortions. There is one distortion which i think is illusion and people are suspect to money illusion. Some would get confused. Now, whether it is good or bad from the welfare point of view, money illusion in a way makes people happier because they think they are getting nominal rate and they feel happier. They may make mistakes in choosing portfolios. This is an issue in which i think we have to think about. Im not sure four percent is not the end of the world. This is the fifth point and the sixth point im going to shoot myself in the foot by taking the position that there is a good reason not to want to go to four percent. It is something i believe. I think one of the great advantages of what we have had until now is that inflation is no longer salient. Inflation was on our mind when we had to take mortgages and inflation was five percent and ten percent and we had to think about it and everybody had to think about it in some way. I think most of us as individuals fought as professional economistvise not fought much about the inflation. Its just very low. That is what green span wanted basically a level of inflation which is sufficiently lowered. Why is this good . In terms of basically means the expectations of inflation dont move and so what you have as long as you dont abuse it is a downward stroking scale. You have a tradeoff much easier. I think if we move to four percent i dont know what the limit is but charlottesville suspect if we move to four percent then people would be more aware than if we get into what we have seen in the past which is expectations of inflation adjusting to movements faster making the job of central bank more difficult. On that i have made six points, five in favor, one not. [ laughter ] and i shall stop here. [ applause ] so my job is to make the case for nominal gdp targeting. Do we have my slides here . And also to point out drawbacks against. I have six points. Thats not mine. Broadly, im going to state a principle, a proposal, make a case for and i will duly make some drawbacks. Thank you very much. Thats me. Just to start at a basic principle and try to bridge so im not all on my own about nominal gdp. Larry did it already in his answer to the question about if you were to do nominal gdp targeting how would it be . What he said is very much what im going to say. To build on the bridge to the rest of the remarks that everyone else is going to make let me start with a basic principle. What is the point of announcing a target or if not a target for Forward Guidance or communication . Its credibility. The target is less useful if it is something that the authorities are unable to achieve and that you can predict ahead of time that they will be unable to achieve then you dont get the credibility. So im going to be a little negative here on inflation targeting. The main point when ben set a goal at two Percent Inflation and when other Central Banks did it, as well, was to get the economy back to full employment. That has failed. We havent hit the two percent goal neither has ecb or japan. Im a little surprised when i hear how should we think five years later about this . We set a target and failed to achieve it so the response is to set a more aggressive target . Do your resolutions you will lose five pounds or gain five pounds. You miss the target so you say next time i resolve to gain ten pounds. That applies to raising the target and also in my view with respect to people speaking before and me and also me. Very elegant. People have to believe it. Theyre not going to believe it after the failure to hit the inflation target. Fortunately, we have achieved what we really were interested in getting back to full employment. Thats the good news. I will say that if the question is inflation targeting Means Central Bank should be transparent about what it sees theflation rate of being in the long term or like the summary of Economic Projections if you say what the long run Unemployment Rate is you are not staking credibility on it. Point number two. This is a more important question. Not the really long term but if central bank wants to signal intentions one to two years either through formal target or guidance unemployment or the bank of england some years back, what is the best economic variable to use to signal your intentions . Inflation and Exchange Rate, price of gold. Shortterm Interest Rates, Unemployment Rates, so on. My claim is and my assignment before you today is to defend the proposition that if Central Banks want to communicate their intentions at a one to two year horizon, it would be more effective if they phrased that commitment or that communication or that guidance in terms of nominal gdp rather than in terms of cpi inflation. You cant hit it exactly. As far would be to go would be to say the mandate is doing everything you possibly can to get as close as possible and if the government fails, she is fired. Thats the fantasy we all had about new zealand in the 90s. I dont think they actually did that, but that would be the most extreme. I think such high level of commitment, whether its inflation or nominal gdp or anything else is not credible. Im going to make a very mild proposal. The fonc releases its summary of Economic Projections i think every six weeks. And submitted by the governors and the Bank President s. I would like to i propose adding nominal gdp as a row in that table. My first choice is it be the first row of the table. Before real growth, unemployment, cpi. So if youre not familiar with it and it gets much less attention than the fthoughts plot. Here is the most recent. First row is projected change in real gdp. Second is Unemployment Rate. Third is inflation, core inflation, Interest Rates. I propose we add a row for nominal gdp. Even if they have nominal growth they construct it by adding together the real growth rate and the inflation rate. Ill go along with. That but i prefer it be the first row and then it gets a little attention and the fed be signaling that theyre starting to Pay Attention to it. There we slide in that row. Now the main point. What is the case for nominal gdp. I want to give a little bit of historical background in case people arent in favor of it, arent familiar with it, what the case was when it was first proposed in the 1980s before getting to my main point, whats the case for it lately. It was originally proposed when the target to be was m one. The fed and the bank of japan, the bank of england were setting m one targets and the number of economists pointed out these were not robusts. The first two were nobel prize winners. Lots of other people including people in this room and i had a paper did some analysis to make the point. At that time the point was that nominal gdp is robust is respect to velocity shocks. An m one target was needlessly destabilizing with shifts in philosophy and nominal gdp target offset that. That was a strong case. Lots of us were in favor of it. Nobody ever did it. Not sure why. Now fast forward. Nominal gdp targeting underwent a rerival around 2011, 2012. Circumstances are quite different. A whole a wrwraaw array of pn favor of it. There were its big in the blogosphere. Heres a partial list of people who have written on nominal gdp targeting over the last seven years. Now things are different. The alternative is not m one. The alternative is to beat a cpi target, core or headline or level or change, whatever. The case in favor of nominal gdp targeting is still that it is more robust with respect to shocks. Youre more likely to be able to live with it expost than a cpi target. Youre less likely to regret why did i ever say that, im going to have trouble fulfilling it. Its ro best with respect to aggregate supply shocks that are the point. The alternative to beat is cpi target. And by aggregate supply shocks i mean productive shocks, commodity shocks, natural disasters. Ive written these are particular relevant in developing countries. In the presence of an adverse supply shock, an inflation target implies needlessly tight Monetary Policy. It says that inflation targeting says that you have to take the entire shock in terms of lost output and you cant let it show up at all in terms of high inflation. The main point, being argument in favor of nominal gdp targeting is it allows the impact of the shift to be divided between some loss of price stability and some loss on the operative objective. This surely comes much closer to what is the ultimate objective function, the lost function that were seeking. And let me give you an example of how the inflation target can get you in trouble. The best example i think is july, 2008. U. S. Has already gone into recession. The world is sliding into what will be the Great Recession. All the forecasts, everyone was marking down estimates of growth. What does the ecb do in july, 2008 . They raised Interest Rates. Why did they raise Interest Rates . I think because there was a spike in oil prices and they were concerned about the cpi target. This is an example where actually the movement was in the wrong direction and the nominal gdp target would have given you the right answer. Here is my graph to illustrate the central point. Horizontal access is real economic activity. Vertical access is flight level or inflation. If prices go up, firms produce more at higher profit margins. We expect to be at point a. In normal times were around point a. We have a supply shock. Oil price increase, adverse productivity shock, a natural disaster, a flood, whatever. That shifts the curve up. Inflation targeting, if it means something, if you take it literally or think it has an effect, that means we have to go to point b. We have to constrict demand so much the cpi doesnt rise and the entire adverse impact is felt in terms of gdp which is not what we want. Point c is where we want to be or somewhere close to that. Automatically thats the Monetary Policy that is called for divides the adverse supply shock equally into an increase in the price level and a loss in output. To complete my assignment last point, im supposed to also mention the draw backs. It does have draw backs. Im going to name three. Maybe the one you hear the most often is essential bank cant hit nominal gdp targets. Also. But you also cant hit cpi targets. Its something you can live with whereas the others, m1 target would have had a disastrous implication if we had stuck with it in 1982 and so on, inflation targets when theres an adverse supply shock. Objection number two. The person in the street does not understand nominal gdp, how it breaks down into real gdp versus price level. I think thats true. To my mind thats all the more reason to avoid setting a cpi target where after the shock occurs you have to explain to people with these kind of pitiful sounded excuses why youre going to miss it. Its really hard to explain it away expost, all the more reason to build it in with a nominal gdp target that you can live with. Finally, it is pointed out that nominal gdp targets are revised expost and that complicates it. That seems to be a valid draw back, but not fatal. Its the same as the point that we cant hit our targets exactly. Thank you. [ applause ] my assignment is to talk about price level targeting. Im going to step back and pick up on the starting point i think for this whole conversation Larry Summers highlighted. Why is this issue a very real concern . These are some estimates that we have of the neutral or natural or equilibrium short term real Interest Rate. The blue line shows estimates for the United States. This is an average of three estimates that do come out of the San Francisco fad. There are a couple ive worked on. Also estimates that come from my colleagues who are just using data from Financial Markets trying to infer from the tips market what Market Participants think the short term rates going to be say six to ten years from now. As you can see larry talked about a number of 1 . You see based on our estimates, the current estimates are running around a quarter percent today. The red line shows our estimates from our model for three other economies is gdp weighted average of the euro area economies. Two points i just make is starting this debate around a 1 equilibrium or normal Interest Rate is higher than many other estimates. There are other estimates higher but these are quite low. The second more important point is they havent moved back up. They wiggle around a little bit. As you see in the United States, this is again picking up on larrys point, the trend if anything is downward. Even as the United States economy, this goes through 2017, as unemployments come down to close 4 the economy has gotten back to full employment, we still see no seens igns this ne Interest Rate is moving back up. These movements in the National Rate of interest not only in the United States but all other advance economies and we didnt say japan but colleagues of mine have also found for japan the natural rate is very low. These are driven by what i think of as global factors, primarily demographics. People are living longer in general. Population growth has shrunken in these economies. Second is lower productive. Maybe changes in technology. Third is this increased demand for safe house. So these are long term sustained fundamental changes in the Global Economy that i think will be likely with us. This just means that Central Banks whether in the u. S. Or europe or in japan have far less room to cut Interest Rates when that next recession comes and that surely will happen at some point. To me the question really is what to do about this new reality and again im going to talk a little bit about price level targeting. So what i i want to just get people to maybe not be quite so afraid of price level targeting. It sounds radical. It sounds very different. Really its a very modest difference from historically what we think of as inflation targeting. Instead of thinking about the central bank trying to get inflation back to 2 , once the over the next few years, youre really thinking about trying to keep the price level growing 2 a year. Its not a radical shift in framework or objectives. Its really a matter of defining what we think about in terms of price stability. I think an important reason is really in the context of the issue of the very low neutral rate. Lets just do what i think of as the unpleasant a ririthmetic ard inflation targeting. In good times half the time well be above 2 . Half the time well be below 2 . Thats all good. But as was pointed out already by larry, once in a while, maybe once a decade or more frequently well have a recession. If that recession is severe enough, the fact that we hit this, despite the best efforts of conventional or unconventional policy well struggle with getting back to 2 or it will take longer to get there. You have this behavior of inflation over history. During good times on average youre trying to keep it at 2 . During bad recessions you get long periods where if inflation was missing the target. Weve been experiencing that in the u. S. And across all economies over the last seven or eight years. When you do that, what you find is that on average inflation is well below the 2 target. This is just the combination of trying to hit 2 in good times and the fact that in bad times theres a bias towards being under the target. In the roberts paper that larry mentioned, in their model, they found that the average inflation rate under a standard kind of policy rule would be i think eight tenths of a percentage point meaning the average inflation rate would be about 1. 2 . I agree thats an overestimate. If you look at a lot of other papers, including work ive done, youre still a genetic finding of this literature is if youre at the lower bound 10, 20, maybe 30 of the time youre going to have a bias of inflation on average being below your target. What that means is two things. First of all, you have this issue that jeff brought up of the credibility, that youre missing your target a lot and it sounds like the bank is not committed to achieving its goals despite doing its best to achieve them. But the second is actually something that i think is underappreciated in the discussion. That is that once people once the kind of Market Participants and people in the economy, Business People in business and households realize that inflation on average is probably going to be below the 2 target, that gets into Inflation Expectations. Actually makes it harder to achieve the 2 objective even in good times. So the two challenges with inflation targeting in the normal procedure where youre basically saying i want to move inflation back to the target as appropriately is that on average inflation will be below that target just because of the zero lau l lower bound. Whats the solution to this problem . Well, the solution to this problem is to get the average inflation rate back to 2 over long periods of time. Meaning to undo this bias or a sim tree in the behavior of inflation that comes from the zero lower bound constraining the ability to add stimulus during recessions especially severe recessions. Basically what youre saying is i want the price level to grow by 2 . For example you could have a 3 target or a 1 target but choosing a target that grows 2 a year over the next 30 years. If you have a period of severe recession where inflation averaged less than 2 , for example, like weve had in the United States over the last decade, then you would be promising to have somewhat above 2 inflation for the next decade to get this average right and basically undo this problem, this zero lower bound in the very low our star is creating. Theres various variations on this. Ben will talk about his variation. Nominal income targeting has its flavor two. I think these are all different ways to achieve the goal. Im not going to say i think one is better than the other. I will say this notion of assuring people that when theyre planning for the future, if youre buying a car and youre buying a house, saving for your retirement or for your kids education, you have this notion that inflation, i understand what inflation on average will be over the next 10, 20, or 30 years. The kind of horizons that households and businesses think about. I think thats one of the real strengths of a price level target over this issue with an inflation target where youre going to be missing your goal for long periods of time. In terms of counter arguments, the and kind of thinking about this, it does sound a little scary. Typically what i hear is youre going to create a recession because you have a runup in inflation and you have to reverse that. Thats one counter argument. The other its hard to explain. I want everyone to take a deep breath. Feel comfortable because im going to show you its not nearly as scary as you might think. I have a second chart. Thats it. And that is this is a simple calculation. I dont want you to take it too seriously. This is from two t2005 to the t quarter of 2017. The black line is the federal funds rate target. The short term Interest Rate. The red line is a taylor rule. Im used a styleized example. Im not saying you have to think of this in this way. If you look at the red line that would you show a taylor rule where Interest Rates move and up depending on the Unemployment Rate and inflation rate. The blue line is the same table l rule that john taylor laid out as a measure of economic activity. Here ive replaced the inflation gap, the inflation term on the righthand side where the price level target starts in 2005. I want to make two points. One is we did have an overshoot of inflation in the mid 2000s. Both the taylor rule and the price level targeting rule have Interest Rates going up. But as you can see this price level targeting rule has Interest Rates move up roughly like they did what the Federal Reserve actually did. Both of these cut rates dramatically when the recession hit because unemployment skyrocketed, inflation came down. Again, these policies and im not putting zero lower bound, both these policies are doing basically the same thing. This is the last point ill end with. Whats critical is the price level targeting rule notices were missing on our inflation target roughly year after year and therefore keeps Interest Rates lower for longer after a very severe recession where inflation is very low is basically promises extra stimulus to help guide the economy, guide the economic expansion higher and also bring inflation back. As you can see, it actually traces out at least above the zero lower bound. So again, i dont see the price level targeting is really scary when you have high inflation in the 2005 period or even particularly now. The last thing i will say on my mind, im already over time i will say on this credibility issue, this only works thrif ita commitment to a longterm change in strategy. This is not something you do, say were going to have a price level target for the next two years and after that exchange strategy. I think what we do need to say, whatever strategy we do, whether its like ben or nominal targeting or standard, its a commitment to follow that strategy or framework for year after year so that people see that were following it and that expectations are aligned with it. I think thats an important concern with any shift in framework is for it to really work as effectively as we hope, there has to be a commitment to stay on that for a number of years. Thank you. [ applause ] im actually going to talk about a lot of the comments that have already been made. I didnt see theirs beforehand. I think the first thing we want to do is look back and say why are we here . Why do we have to think about rethinking the inflation target. Key lessons from recent years. The first is the back straight on Monetary Policy combines more often than expected. Three reasons which were mentioned earlier on. First is the economy can be very nonlinear. The way of thinking is if we had a wilee. Coyote situation where he went over the canyon and then realized there was a problem and fell down and crashed. This fact that the economy is nonlinear can actually lead to more frequent hits of the zero low. The second is that Financial Disruptions can actually have much bigger effects than we expected. Unfortunately that happened to us. The third which has been emphasized by many is that the natural rate of interest has fallen. As a result youre more likely to hit the zero lower bound. The other problem is once the zero lower bound constraint occurs its harder to stimulate the economy. Nonconventional tools are less effective than we had hoped. If you think about what the key problem for Central Banks right now is that its very hard to get inflation up to the levels wed like them to be so that the zero lower bound problem is actually worse than we expected. As a result that means we have to rethink the inflation target. One approach is that the inflation target should be raised to Something Like the 4 level. The argument for this is very strong. This is the pros. With a higher target you have basically a higher natural rate of the nominal Interest Rate so youre going to have the zero lower bound occur less frequently. Basically with a higher target for inflation, conventional Monetary Policy is actually going to have more room in order to stimulate the economy when you get a big negative hit as weve had recently. There are some serious cons here. I want to discuss these because youre going to see imnm not going to advocate that re raise the inflation target. Green span had this beautiful definition of price stability which is sort of similar to the definition that the Supreme Court defined pornography. You sort of know when you see it. In this case he said that price stability is when Economic Agents are not spending a lot of time worrying about inflation in terms of what theyre doing. Thats actually something very positive for the economy in terms of getting people to focus on what they really should do which is produce goods at low cost rather than worry about financial transactions. The problem here is that once you get above to Something Like 4 i dont think thats consistent with the greenspan definition. Then 4 , why not 6 , and if yo get a spiral where the commitment to keep inflation low is disappearing. We went through that situation in the 1970s. When we think about this, how do we get into a situation like this . Think about what happened in the 1960s. That there was a view you could tolerate 4 to 5 inflation. What happened . We got to four but why not six . What we had was the socalled great inflation which was a very bad period in terms of Monetary Policy. Another key lesson that we really learned from the last 20 years is how valuable it is to anchor Inflation Expectations. Indeed this case the Central Banks have been successful at anchoring at 2 . That was extremely important in terms of both limiting the variability of inflation but also allowing Central Banks like the Federal Reserve to be extremely aggressive during the crisis in terms of actually pursuing very expansion Monetary Policy in order to get out of the crisis and not worry that Inflation Expectations were going to spiral out of control and youd get into a problem. The other issues are that there are problems in the long run that you have to worry about. Even though having higher inflation may have some welfare costs, in the short run thats not a big deal, but think that it happens t continually, it sts adding up and there may be bigger numbers. So when i look at this my view is should we raise the inflation target about 2 . I think the answer is no. This is a cost benefit calculation. The cost of raising inflation target to 4 outweighs the benefits. So how will we treat the inflation target . I would argue that Monetary Policy should at times and now is the time, should at times think about overshooting the 2 inflation goal. And so the key problem here is that inflation targeting, this is something that john mentioned, is not what we call history dependent. It treats by gones as by gones. And theres a compelling theoretical argument that in fact you want to have history dependent policy in which, when you have undershoots of the target you want to have overshoots of the target so inflation will be at a level consistent with your goals. This is something that john just mentioned. If you think about this price level targeting its one of these forms of history dependent policy. The way to think about why it works well is that when you get a negative demand shock which results in the price level falling below the target path which say is 2 growth of the price level at a steady rate, then what happens is that because youre under shooting you now have to get back up to the target, the price level target and that means that youre temporarily going to have to higher inflation. That feeds into expectations which lowers the Interest Rate and provides the stimulus that you want in that particular kind of situation. Really what youve done is put an automatic stabilizer into policy. Of course this is really very important when you hit the zero lower bound situation but actually valuable even when you dont. Another similar policy is nominal gdp target which jeff is talking about. In a sense it has more desirable characteristics. If you look at the work, what they do is say the target criteria should not be in terms of price level but should be where you are the natural rate o of out play. It turns out to be not toor away from a nomminal gdp target. I want to argue there are big challenges to price level target and nominal gdp targets. John may talk about this. Its one of the reasons why canada didnt go to it. I think its really much harder to explain that youre aiming for a target thats moving. We dont think it should be the same level. Its harder to shoot for a moving target than explain it. One is a communications challenge. The second issue is that because its harder to explain, when inflation temporarily rises above 2 people may start that worry youre not really living with the 2 inflation goal and that could unhinge targets. People might not know what nol n nominal gdp is. Theres a lot of debate what the natural rate of unemployment is. We really dont know. In fact we know that when periods when that there were mistakes made on this, there were big mistakes made in Monetary Policy. In 1970s the example where there was a view that the natural rate of unemployment was 4 when it was closer to 6 . So i think this is one of the reasons why we havent seen a dopg adoption of this kind of target. Why do we have this 2 Inflation Expectations but have the history dependence. I would argue the way we should think about doing this is think about inflation targets not in terms of shooting for 2 but the average inflation rate to be 2 . In fact ben actually just recently made a proposal about this. I made this proposal a year ago. Didnt know about ben. Ben hadnt seen it. Great minds think alike. Sometimes its not great minding. We just Work Together too much. That could be a problem as well. The idea is you have a 2 target over a particular period. Say five years is one example. Bens suggestion that you do it since the zero low bound hit is very much in this kind of framework. There is some subtleties about whether you want to do one or the other. We can talk about that later. What does this do for you . Inflation running about 1. 5 . That means that you have to do 2. 5 for a while. So the desirability of this is that you get exactly the kind of history dependence we want which is that Inflation Expectations would rise for a temporary period of time which would actually make the zero lower bound have more expansionary effects. So but even if you worry about what jeff is worried, that you might not actually have an expectation channel, one of the key points here is that no matter, even if that didnt work, its still telling you you want to be more expansionary than you would be which is the right policy. In that sense i think it has its desirable characteristics. By the way, is this pie in the sky stuff . No, it isnt. The reserve bank of australia, im very partial to them. I visit them all the world. This kind of policy is exactly the kind of policy that the reserve bank of australia has done. Knowing the history of this, it was actually sort of an accident. I dont want to go into that. I was there when they were formulating this. What theyve done is they have a target which is 2 to 3 . They shoot for 2. 5 . On average over the Business Cycle. Theyve had very, very good performance. I should mention that as my mother always said, its better to be lucky than good. They have an element of that as well australia has had average inflation rate. And they havent had a recession in 25 years. And indeed if you actually take this kind of approach that it mentioned which is very similar to what kurt looked at, what he did he actually looked at a case of what you would do if you were doing Something Like this and had a 2. 5 inflation goal for a short pest, you wouriod of time have produced better outcomes. Whats my bottom line . My bottom line is the fed and other Central Banks should commit to an average inflation rate of 2 so they still stick with the 2 number. They do it over a fixed period of years. It could be over a Business Cycle. And you actually commit to doing that as a modification of the inflation goals of the Federal Reserve. However its important that when you do this you make it very clear what youre really shooting for is a 2 long run targ target. To me this is sort of a way of getting the best of all worlds. Getting to a lot of the issues that they have raised. But doing it a way that i think is practically more practical and also something that would very good outcomes. Thank you very much. [ applause ] im going to put this all in context. Thanks for arg niorganize r org. I want to say i agree with the initial comments thinking about how Monetary Policy can respond to the next recession. I know the Federal Reserve, we can tell from the minutes and speeches they are thinking about it. So i strongly support the general efforts to do that. I think as we do that we do have to keep in mind its like the joke about how do you get to temporary . We dont start from here. Were not starting with a blank slate. We do have a system framework, 2 target in which there is a tremendous amount of investment in the sense of communication, of years of experience and anchoring of expectations around 2 inflation targets. I think that argument that says what we do if we start from scratch is interesting from academics but maybe not the mot relevant question starting from where we are. Yes, it may be the case the target might be higher than two given what we know now. If its 2. 2 i dont think that justifies a big change in framework. We have some fixed costs. As we look forward we have to think about the benefits of changing and think about if we go to a new approach suppose and it could happen in ten years that nominal Interest Rates will be higher. Maybe productivity will pick up. Artificial intelligence will finally start having the benefits we hoped. If we are locked into a higher inflation target, how would we respond to the next change in the environment . Were going to hear from the bank of canada about their five year process of reviewing but i notice also which is very good and theyve gotten a lot of praise from american policymakers, i notice they havent actually changed their framework. It is costing to change your framework. In terms of the individual approaches that have been suggested, i think the one that ill just make a prediction, the Federal Reserve is not going to adopt a 4 inflation target. Not going to happen. From a theoretical perspective, first of all, i think woodford and others have shown its an inefficient way to deal with this. Inefficient first because it gives you high inflation all the time whether youre close to zero lower bound or not. When youre at the zero lower bound it doesnt give you any particular additional push to get out of that situation. Its not a very efficient approach. Thats the theoretical objection. The political objection is that the u. S. Public is not going to be very open to 4 or 5 inflation target. In particular i do worry that some of the people who are pushing this, so many of them are proexpansionists. They might find if they open this up too much theyre going to end up with a change in the law that eliminates the employment goal rather than reassert the price stability goal. In terms of the options on the table my own preference i think at least tentatively like johns is to look at some vary variant level targeting. I think its in many ways similar to the current framework. You talk about average inflation rates over a period. I do think that there are problems associated with undoing price level shocks away from zero lower bound. An oil price shock. Core inflation. I guess my own preference would be to apply this primarily at the zero lower bound, specifically when there is a deficit of inflation over a period where Interest Rates are at or close to zero. Then that deficit becomes an additional input into the policy debate policy discussion. Which leads all else equal to a tendency to overshoot inflation coming out of zero local bound. To the extent that is anticipated it gives you greater policy stimulus and greater impact even going in to the zero lower bound period. Now, one objection, sort of generic objection is we dont really believe we can change expectations. We can get people to believe some kind of different policy process. I realize it is difficult and weve seen in the case of japan it is hard to get expectations changed which of course is the reason why any change from the Current System is going to be complicated. But i think that with the plt, price level targeting approaches your focus is not necessarily on getting the average person in the street to expect higher inflation coming out of a recession. Rather your main audience is the Financial Markets. Weve seen from the recent experience that when the fed announces theyre going to keep rates lower longer, the bottom market reacts to that. It may not be something the average person responds to but if the bond market responds to and you get additional policy stimulus it could be effective. On nominal gdp targeting, reject two arguments and explain why i think its still work taugilkin about. One argument we heard from larry is if you raise your nominal gdt target, it will disguise youre not raising the target. Thats not going to work. The second argument came from jeff. He compared gdp target to strict inflation targeting. Its, quote, flexible which means that as stated in the feds policy principles the time it takes to return to the inflation target depends on the state of the economy. And so in fact inflation targeting can accommodate a supply shock. Now i think the reason nominal gdp targeting is worth looking at is its actually very similar to price level targeting. Let me make the comparison. Growth level, targeting of the nominal gdp growth rate is similar to inflation targeting and targeting the level of the nominal gdp is very similar to price level targeting. We talk about the relationship between growth targeting and inflation targeting. Targeting nominal gdp growth is targeting the sum of real growth and inflation. So its live flexible inflation targeting that youre targeting inflation but because youre also looking at gdp growth youre allowing for lighter easier policy when gdp is below trend and tighter policy above trend. What are the advantages and disadvantages of gdp targeting relative to inflation targeting, one argument is nominal gdp targeting requires less information. On the other hand you have to know what the nominal gdp is that and is produced in a lag and noisy way. Thats a balance you have to make. Another argument is nominal gdp targeting is less judgmental in the sense that it sort of builds in what your flexible response is to changes in gdp whereas inflation targeting is not so clear how the fed will respond. It depends on the costs and benefits of both approaches. One interesting aspect of nominal gdp targeting is that as larry mentioned if you have say fixed 6 target, if real or potential growth goes to 2 that raises your inflation target to 4 4. Is that good or bad . That has a tendency to offset the problem of low nominal rates. The one problem with that is that you could get in a situation of very low growth and then the fed would be essentially targeting high inflation. Thats not going to be popular and may not be sustainable. My bottom line is that of the various things suggested i think that variance of price level targeting the most appealing to me although i recognize and i would recommend to the fed they continue to look at nom ninal g measures. Let me conclude by putting out what i consider to be a minimum requirement. I think you can make the case given that the cost im making this hypothetical case. Im not saying its correct. You could make the case that with the cost of changing, and i think that larry may have overstated a bit the severity of the cost where it is, let me make a couple points. One is that its been pointed out by others that the Unemployment Rate in the last recession came down about as quickly as normal. If thats your best measurement, the fed did get slack down in a reasonable amount of time given how deep the recession was. Moreover, despite the fact that people think that it may occur again, long run stestimates of inflation are still pretty close to 2 which is suggesting that the markets dont expect long periods of very low inflation because of the zero lower bound. So maybe what im arguing is that maybe the situation even in the current status quo isnt possibly as dire as was portrayed and indeed i guess the other argument i would make is that weve learned a lot from the recent experience not only of the United States but in europe and elsewhere about how to use unconventional policies, how to signal more effective, how to coordinate and signaling. Lets say for the sake of argument that the fed decides that given the cost of transition that none of these alternatives are attractive. I think what they ought to do in that case is add to their statement of policy strategy and principles a statement about how theyre going to attack the next zero lower bound period and be explicit about in general terms about how they would use Forward Guidance, under what combination and what criteria to provide not only some clarity but also to maybe even be effective in one of the benefits of these frameworks is that markets anticipate how the fed will react even before you actually hit the zero lower bound. Possibly if the fed laid out you on it expects to respond to the next cog zero lower bound it might make the probability of hitting that zero lower bound lower. Thanks. [ applause ] im just going to tell all of you that we need to the mic on when we speak and its the thing in the middle that looks like a person talking. Its very odd looking icon. Thank you all. That was so interesting. I want to start off with a clarification before we get into the meat of it. When people talk about these different targets or different framework, sometimes i get confused. We are talking if you go for the price level or the higher inflation to something that keeps dual mandate and just affects the price piece of it but keeps the unemployment piece . Is that right . Is that the right way to think of it so were not giving up on the unemployment piece . I think thats a very important point because i think a number of people when they hear price level targeting they think of the first jgeneration f inflation targeting where there is a unit or one goal of inflation. The way i described it in my picture was one where you have a dual mandate goal of maximum employment and the price stability. Youre managing both of those. Nominal gdp target also does that as well. Approxima let me just add i think a key here is the word flexible inflation target. This is why i agreed strongly with ben. The character swrization of how deal with supply shocks is not the way that sensible inflation targeting is done. And that if you think about the way of thinking about what approaches were basically trying to optimize by minimizing output gaps and indeed a way of talking about this, communicating it is with flexible inflation targeting. Its another way of saying the same. I actually had a question for you. Ben mentioned this. I was not sure when you were talking about the nominal gdp targeting if we were talking about growth rates or levels. Those seem to be very different. Well, im with ben. Theres a close analogy. Theres an elegant argument in favor of the level. Theres a more practical argument in favor of the rate of change. N nominal gdp versus inpoliflatio. Theres a choice to be make. Im making the choice for nominal gdp whether in terms of levels or rates of change. I understand the argument in favor of level which is the way it has a way of working in your favor. The disadvantage is what if nobody actually believe its. If i could add a point. A number of people have said theres no big difference really. Call it flexible inflation targeting. Call it a taylor rule. Whatever. Theyre in favor of it. Im in favor of it. Youre clear about the long run target of inflation is. Then at a shorter horizon like one to two years most Central Banks still, even after all the troubles, want to be more transparent. Want to signal their intentions, even if its just Forward Guidance rather than setting a formal target. They say flexible inflation targeting says youre allowed to take into account output or unemployment. My answer is fine, i agree with. That lets put it in the summary of Economic Projections. It has real gdp, inflation, unemployment, short term Interest Rate. It doesnt have nominal gdp. I want to put nominal gdp, at least give it that level to let people know how the fed is thinking at the one to two year horizon. Im going to bring back something you started to mention which is lets talk about the role of expectations. All of you wanted to give us some new room that will give us room that we need. There were two ways. The direct way is to say lets just raise inflation and make it simple. Change the target and then less likely to hit zero lower bound and back to the way we used to operate. The other way is thats too costly and we can do something sort of more subtle. Which is to say were not going to raise the long run target but were going to change Inflation Expectations kind of over time depending on conditions. And i guess also the way that this would help with the zero lower bound is not to say that were going to start off necessarily with a higher nominal Interest Rate but that somehow because of changes in expectations the lower bound wouldnt hurt as much. Wed get out of it as fast. Is that the right way to think of it as the sort of differences . One is that you would get out of the zero lower bound and two, somehow you would manage the benefits of having higher inflation target without the costs . Many of the papers which were written to try to derive how worried we should be about the zero lower bound basically were done on the expectations. It was fairly easy to get out. You basically announced there was going to be more inflation and lo and behold you did. What weve learned is it doesnt work. How does it work . Not at all. Does it work a little . I dont know. I would much prefer to have inflation just when we need it. Im a bit skeptical that it can be done. So thats right. The difference between having high inflation and sort of having it when you need it, exiting from a zero lower bound period, if people think that youre going to overshoot in that exit, it has two benefits. One is it makes the market more accommodating because Monetary Policy is going to be easier for longer. Secondly higher expected inflation lowers the real Interest Rate. Let me raise a question which i think which will be central to the debate. I guess my answer is that while it may not be the case that again as i said in my remarks that the average person will understand the subtleties and feed them factor them into their decision making, i suspect the bond market will. At least initially that would be enough i think to get some benefit from this approach. Can i go back and make a point that larry made earlier and will probably make again. Yes, you get two effects. You get hopefully high Inflation Expectations. Thats good. Even if you dont you get nominal Interest Rates for longer. What he argued is that the room to do this is actually quite limited starting from the kind of very nominal rates that we have. Youre now going to make a whole other difference when the long rate is already low and will go down more because youre decreasing the short rate. Yes there are two channels and even the expectation channel doesnt work, theres the other one and the other one is weak. A question briefly. Suppose you have even, i dont know, you get a couple points that you can reduce on the short rate and then his argument was you then have 150 basis points in the long rate. The usual rule of thumb for the fed is that 25 that it takes 75 basis points of fed funds cut to get a reduction in a ten year yield. 100 basis points on the ten year yield is 300 basis points on the fed fund rate. It all adds up to about the total amount of production you need. If you can get the ten year rate, thats quite a bit of additional stimulus. I have to speak for him. My sense is he was arguing that you were getting most of the effect on the long rate without that and then that additional commitment will not buy much. To cut the short rate will have know effect on the long rate. The additional commitment to do it for another five years doesnt buy you much more. Thanks. Let me keep on with the question of this promise to raise inflation. Is this something that is a change . So people sometimes describe this as a rule which framework by the document which we review every january is a statement that states very explicitly our goal is to balance dual mandate objectives but bring inflation overtime back to its target. What were carrying out in my view is a policy that the goal of which is to get inflation back to 2 over the next couple years while managing the dual mandate objectives. I think this is actually a critical issue in terms of thinking about the Current Situation versus maybe more like whats the long term framework. Let me give you an example. Ill be happy to hear ben add his views on this example. But one of the challenges the fomc faced in 2009, 10, and the first half of 11 is that Market Participants were basically at sea about how the feds reaction function works when youre at the zero lower bound. In my interpretation a looked at history and said the economy generally recovers in a certain way and the fed generally lowers rates for a certain period of time and then over the next couple of years will raise to back to normal levels. Throughout that period all the way through august of 2011 Market Participants really were struggling with understanding how were behaving in the circumstance. They were specking us to raise rates starting 12 to 18 months despite lots of language in our statements and speeches that we were going to keep Interest Rates low for quite some time. It was only in the august, 2011, meeting where explicit date based Forward Guidance, one of ricks least favorite topics, was introduced and we saw dramatic shift in expectations of markets. Just as ben said, what mattered was that the markets understood what we said. I think the ten year treasury fell by 20 basis points on that announcement and we saw with our future guidance statements a significant effect on financial conditions. The big advantage to me of a price level targeting or bens version of that or some variation on that is that that would be built into the framework. That expectation that we would have lower for longer, that we will be keeping Interest Rates low not only to help the economy recover but to reachieve our price level target wouldnt be something we would need to put into our statements or struggle how to do this. This will be us executing on an agreed upon framework. So its is going down this road at all changing the balance between rules and discretion . Is that kind of making you a little bit more rule based by saying youre going to have to history dependence or not really do you think . Zblp i think the issue here and the whole purpose of actually having a target is to deal with these issues of rules versus discretion but still have flexibility. I think that issue is a completely separate issue. Taylor rule could be done with a price level target. Taylor rule actually has this in it. It has the output gap and the inflation gap so instead of having which implies you an inflation target, you could do that with a price level target and have a taylor rule done that way. That issue is a completely separate one. Ive gone on record i do not think we should have adopting some kind of instrument rules like a taylor rule. But i think its a completely separate issue from the one were discussing here. About this accountability what did that other button actually do . Im curious. It bought you a diet coke. I guess ill stop pushing it. So i think that accountability, something rick said at the end of his presentation is absolutely critical. Getting the nominal anchor is the most important part of a Monetary Policy. And thats why i am arguing for Something Like a price level target because i think that will happen anchor Inflation Expectations even with the zero lower bound. I think from an accountability point of view its actually not that complicated. If you have a price level target with a dual mandate you can plot the price level target. And of course then go through the normal explanations of why the price level is somewhat higher or lower than the target and what well do to achieve it. I dont think its any more difficult than a nominal gdp target. You have a level. You talk about where you are relative to that level and how youre best going to achieve in relation to that level. Its important that this is done in an inflationary way. Think about a strategy that gets you back to your target over a few years and best manages your dual objectives. Can i go back to something that you mentioned, but dismissed which is the symmetry of a price level target, which is on one side when inflation has been too low, its fairly attractive, to say its going to be higher, but on the other side when the economys doing fine, but theres an excessive inflation in the past, you actually have to slow down the machine because you promised . Do you think that theres any credibility to that part of the rule . Its my impression that will never happen. So its interesting that the meeting the American Financial associations meeting that just took place, they were talking about nominal gdp targeting. And they did in their presentation a few historical episodes where they looked at where a nominal gdp and i would say a price level would have the same result would have told you to have tighter policy and i think the examples were, in the late 90s and the mid 2000s, they made the argument, maybe policy could have been tighter during those periods, based on their analysis, it wouldnt have necessarily been a bad thing. As i showed in my chart which showed the price level target, we did run a few years above the target persistently before the recession and the price level target would call for slightly tighter policy but not dramatically more. So you were talking about how the target audience for the expectations is the markets, so that, you know, communications are for the market and not main street, but i wonder if you worry about overshooting, whether or not that would still be the case, whether or not you would start hearing from main street, inflation is running really high, i dont believe the fed anymore, theyre just political. So what is the dangerous for people who dont understand this more complicated rule that they would misinterpreted it and that would have implications for the fed and for the thats why i think communication is a key element of this. If you look at basically what john, ben and i, our opinion is really very similar and its really about communication. And thats why i like communicating in terms of average inflation rates, because price level targets are not going to be inflationary to the public. But its both, right . A change in communication and a change in your reaction function . Because its not just communicating what the fed is doing, its having to change what the fed is doing and communicating it. Just one final question, which is, so, we are worried about the possibility of the next recession, we said it could happen sort of any time. What and yet, we still think that changing the frame work is a very hot topic, what is the timing for this kind of thing . How long can we wait because now we feel like maybe theres just too much political pressure on the fed and how do we go about getting to a place you could make the change, because i think everybody here wants to make a change, everybody feels vulnerable for the next recession and so how do we get to that . How do we develop the political i can speak freely since i dont have to just based on my experience with the f1c, we presumably have a new chairman and a new incoming vice chairman, im assuming somewhere next year, im assuming in the first half of the year, there will be discussion of staff up to a year or so. But at some point, im just guessing based on my past experience, somewhere in 2019, i think there will be some pretty serious discussions. For those that are interested, we had similar discussions at the fomc in i think it was november 2011 when we were looking potentially at a frame work to deal with what john was talking about. At that time, i think the general feeling was in the middle of a recession was not the right time to be making those kinds of changes, but i imagine this will come up for a serious debate in the next year to 18 months. Again, it is a big step, i dont know what the Public Engagement would be for that, whether the fomc would announce Something Like that or they would begin to engage with politicians and the public and so on. Im not sure about that, but its certainly something within a reasonable period of time that the fomc and the staff can evaluate. Yeah, i really should have said my disclaimer that everything i said reflects my own views and no one else in the Federal Reserve system. I actually think this is paan important part of the process too, whether conferences or forums or other types of things we can have where academics, experts along with central bankers is really part of that to think through these issues. I agree with everybody that you dont want to jump to a new frame work without fully thinking through all the risks, all the possibilities and situations where because its not something you want to do every couple of years, i also want to point out that this has international ramificatioramifil the issues that were talking about in terms of a low neutral Interest Rate, other developments that led to this discussion apply to all the other advanced economies and in fact i would argue that in time, well start applying more and more to emerging Market Countries as well. So 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 to really be thinking through. Because we also know from the work of many economists in the last few years, 0 lower Interest Rates, 0 lower bound and also International Facts of Monetary Policy actions. So we want to think very carefully in that context. So build on that, the big emerging Market Countries are dealing with these issues, they dont have a zero interest problem. Theyre committing to getting their inflation down. Productivity shocks, weather disasters, terms of trade shocks and thats my reasoning for nominal gdp targeting. In response to both of the last two questions you asked, louise, and olivia, i said, when we started this all all our models are based on whether our goal is to get inflation down or to get it up as its been lately, if a central banker were pure at heart, or if they had their hands tied, the magic expectations throughout the economy would be transformed and you could do things like getting inflation up or down without paying output costs, but i dont think the discussion among the economists has acknowledged to the extent to which they had failed. They really meant that about the 2 target and they didnt achieve it, not anywhere. And if any of these very clever proposals about level change or whatever nominal gdp probably would be as transformative as which think. And the idea that ben had, if you open up the process, it will get politicized, so i actually am going to vote in favor of what we have already got, if it aint broke dont fix it. I agree with you, theres an issue about whether in particular, the kparexample of japan, not only to get inflation up, but to Inflation Expectations up. But one of the things is when you choose this policy, if you undershoot then you try to overshoot, the actual policy changes, and that actually means youre going to get policy that will lead to higher inflation when you want it, and that in itself produces some good results. Even when people are back looking to a greater extent they are, one of the great successes of Central Banks is that we have anchored inflation at 2 . And one of the results of that is that inflation did not get into did nation during recession. In fact this man is one of my heroes, for many reasons by the way. But if you ben is going to go down in history as somebody who actually made sure that Inflation Expectations stayed anchored, that was the whole thats what we were trying to do through that whole crisis, is make sure that people we didnt go the route of japan, so in that sense, i think that policies which tend to lead you to anchor that, and in fact in this history dependence, well have benefits in that direction to do exactly what we want in that regard. Im going to help up to the audience and take a few questions. Right over there. Tell us who you are, please. Thank you. Two quick questions, particularly for John Williams and ben bernanke, please, the first is, would a price level target be helpful in managing expectati expectations, Inflation Expectations in normal times under a condition of a very splat phillips curve where you may be points away from your inflation target, and second is when you have these rules that commit to staying local longer, how would you integrate that with Financial Stability concerns . Also for John Williams, in your presentation, you had a chart on the price level targeting rule and had 2005 as the start date. Obviously the start date is critical in terms of what policy is being inscribed now. So how hard would it be to find a consensus on the appropriate start date and number two, who gets to decide, would it be the fomc, a Committee Like ben bernanke was talking about, just how do you see that whole process going about . Okay, one more. Question for everyone. If returning to 2 is so desired, why dont we go back to cpi like many other countries rather than sticking with copz, which was implemented 20, 30 yearsi s ago, with inflation a 2 level, i another quick answer, cpi runs and pce runs, about a quarter of a percentage point higher than pce so i definitely would not say lets switch to a 2 cpi target at this time. And, you know, we have chosen the broadest measure of consumption prices that pcus brought us of index, so its a very good measure of inflation, so that makes sense. Let me answer very quickly the question about my chart, because theres a technical part and theres a substantive part. The technical part is when i drew that for presentation last year, i basically viewed 2005 as a place where the u. S. Economy was roughly at full employment and inflation was running about 2 at that point and so it seemed like a neutral place to start and i was assuming a 5 natural rate of unemployment, so basically thats why i chose that. But obviously if youre thinking about any of these kind offensive procedures, a nominal gdp target or a price level target, that would be one of the considerations is what would be the right rate to start it at. And whats the right timing of this debate . The right timing of this debate is really now because the u. S. Economy has fully recovered from the u. S. Recession, and now we have the second longest expansion in history and we hope were going to be getting to our inflation target so thats a kind of a neutral point to start implementing our strategies. But if youre in the middle of a deep depression or a very difficult situation, thinking about changing the strategy does conflate two things, i want to stimulate the economy, what is the right frame work . So now we can really foe discuss on longer term missions. Switching the cpi target would move in the wrong correction because we want a higher target, not a lower target. Good question about theres a real practical issues of the lower stability target. The standard answer is the mack kwoe does it make it any worse than, say, having Forward Guidance . Im not sure, but its clearly an issue we would have to think about. The other question we would have to think about is if inflation questions are completely adaptive, and you have these overshoot periods does that increase patterns in economic expectations, the only way to sudden study that in the absence of actual experience. And tries to look at the range of outcomes. I think the ideal thing, if we could just persuade new zealand which introduced inflation targeting in 1990, decided to do inflation targeting for a couple of years to find out how that worked, would be a tremendous benefit to the rest of the world. I said that when i was in new zeala zealand, so they said they did that when they became the inflation target. I find todays discussion extremely informative, believe it or not. At the bank, were starting to think about the next inflation targeting rule. I think today most of the discussion is related to the existence elb and the consistency of hitting the elb, which limits our Central Banks ability to respond. But what does that mean, we should tackle the existence of elb instead of thinking about alternative Monetary Policy frame work, for example shouldnt we be thinking about being able to eliminate elb and value ba value central bank money. A question for everyone. So one of the things we vicepresident discussed in this is the one of the things we havent discussed today is some of the forces of inflation are probably outside the purview of Central Banks, for example, the technology at this point is exactly what central bankers would exclusively control, for example the phillips curve is flatter than it used to be, things like that, so i think the question is, is there a consideration that inflation target can actually be lowered instead of being higher . Thats been something thats been suggested by the bis, clau that the bis should be lower than 4 or 3 . Thank you. It came up earlier this 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 i would like to hear what panelists think about possible changes in the powers the bank would have and the previous questioner asked about things about removing the negative Interest Rates and a couple of other thoughts, the other would be the fed has a lot less ability to buy assets than other Central Banks. Maybe the normal basket of assets in the central bank should be a basket of all assets in an economy, and another possibility would be perhaps under limited circumstances do helicopter money, when youre at the treasury bound and if the secretary agrees, you could mail out checks. So on the there are two ways to think about it is allowing nominal rates to beand that goes backs to why is it that safe rates are so low. There are two ways to think about it. One is that its deep forces like demographics and such, and its going to be really difficult to do anything, and there are safe assets, hypothesis which is a revised reason is that theres a reason for very large assets and if we just set that demand, we would get to a higher equilibrium rate. And that would go a long way to decrease the probability of theres always this issue about when you have undershot a target, should you lower it . Sa and this has come up, i actually did an evaluation of swedish Monetary Policy. I think thats actually the worst thing you can possible y , and the reason is you get the wrong set of applications dynamics. I give a speech called comfort zones schmumfort zones to bring a little bit of yiddish do the subject of Monetary Policy. When you say im going to lower the inflation target, that actually has the opposite of the inflation dynamics of the price level targeting. It mines that any negative shock is actually going to propagate even more. And in the academic literature this is one of the things thats discussed, it happened in the great depression, you actually had a demand shock, and then inflation set in, and thats when you get a disaster. I know that this issue has been raised but when you think about the theory of it, its actually the worst thing you could possibly do in that situation. So fundamental problems, zero lower bound and some radical suggestions have been suggested, like abolishing cash all together. And then i just got to return to a question that someone asked in the first session, when larry was talking about what about fiscal policy . The conditions for the zero lower bond, or the Monetary Policy is not powerless, but its really, really tough. Now larry said its very hard and he did it, had to deal with it and he learned that there were no shovel ready projects, the fastest projects took a year or two years or three years, but didnt we learn this that would have been great a year or two years or three years of fiscal expansion . I think that thats not so hard. More generally, in the length of my career, which is similar to some of the other peoples career here. We have forgotten the most important thing we learned in macroeconomics, you at least want to try to have fiscal policy Counter Cyclical. But the last thing you want is it for it to be pro cyclical. What we have in this country and some other countries pro cyclical fiscal policies, you have politicians thinking when the economy is booming, thats the time for tax cuts and when the economy we economists need to talk more about the desirability systematically of having less pro cyclical fiscal policy and its got to be greater than some of these second order things were talking about. Theres an issue about having, what we have really talked about is Monetary Policy capacity, thats the argument for why you would want to hire inflation target. The same comes up for physicifi capacity. If youre actually doing some savings, that helps you get caught up when times get tough. They looked at countries that had more fiscal capacity and more monetary fiscal capacity, they actually did better during this last recession. And its obviously very current given the recent tax bill. The last question, right in the back. Rob martin, uvs. Im just wondering all the policies you talked about today rely to some extent or another to the Central Banks have a great influence over inflation, given that most Central Banks have missed their inflation target for quite a period now, do we have to see a place where banks are hitting their targets i fear a change in policy still missing and then having even a greater loss of credibility. Im going to stop with that question, because i think we dont have that much time and its a great question. So we sort of brought up a little, which is do we actually have a way of achieving any of these new rules . Can i respond to this . First of all i think it goes back to an earlier question. I think in 2011, 12, it might have been a very difficult time to talk about any of the issues that were talking about because it seemed like you were struggling just to do the basics. Now i think we have shown that we have gotten the full recovery, were on a good expansion and we expect inflation to moving to target. So we think its a good time at least in the United States to have this discussion. I will bush back on this premise that we lack credibility in the United States because we have been missing our inflation target. Janet yellen gave a really great speech last week about the inflation experience during the recovery and highlighted that up until 2016, the short fall inflation was exactly what our fed models, such as they are, what it would predict. We had a period where the Unemployment Rate was very high due to the severity and length of the recession, we had some other factors such as the import prices, Commodity Prices things like that which obviously affect inflation, the inflation story, the fact that we missed on our inflation target was a direct consequence of this very deep and long recession and slow recovery. So me, you know, its not a sign of a failure to achieve our inflation target, but much more just a reflection of the difficult of getting the economy back on track. Now a lot of people focused in 2017 about the fact that inflation dipped after rising almost to 2 , of course thats a really of inflation, it tends to move up or down due to different factors, whats critical to me is that not that our inflation was over target during the recession, its really that we achieve our inflation objective Going Forward. And i think that this gets back to one of the advantages of price level targeting, that when you have a standard period of missing your targets youre going to carry out inflation thats somewhat above, and i dont think that thats that difficult a mission to actually accomplish. And with that, we hope you have all enjoyed this session as much as i have and join me in thanking the panel. Were going to take a 15minute coffee break and well reassemble at 3 30, so theres coffee out this way, restrooms are out that way, please join us in 15 minutes. So lets bring you some of our earlierer event with secretary summers making his remarks. My job at a conference like this at a moment when i am not in government is p provocative and hopefully be sound. My propositions are at route 2. One, first proposition, our current frame work is likely to involve unnecessary costs in lost output on the order of a trillion dollars 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 these arguments. 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 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 possibility serial correlation in the 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. Reasonable judgment then if we current to operate in our current framework, its a reasonable expectation that in good times, ratings will be in the 2 to 3 range. And it seems to me thats a projection fraught with a good degree of error, but i cannot believe that the thinking that the fed in the market sector are massive under estimates. Second proposition, recessions will come. What is the likelihood of recession . My reading suggests that the best thinking is that recoveries unlike people do not dies of old age, that the probability of recession once one is significantly advanced into a recovery is essentially independent of the length recovery. And that that possibility, depending upon how far back one looks is somewhere in the neighborhood of 15 to 20 on an annual basis. Thats a historical reading looking back through 50odd years of Business Cycle history. Is it the right view Going Forward . You can make a case that its an understatement of the risks going dprartd, that case would emphasize that normal growth is now 2 , rather than 3. 5 , and 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 that the past probability is an overestimate, would emphasize lower inflation as and less risk of inflation getting out of control and having the fed to hit the brakes, it would be a less tangible 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 down turn. 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 substantial credit rationing effects that were important in understanding how the economy functioned, so that 5 struck 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 that about a 5 reduction in rate is necessary. You can see where this is going two. 5 is substantially more than 2 to 3. So the likelihood, i would argue, the overwhelming likelihood is that when recession comes, policy whether will not have sufficient room to cut rates as much as it would like to within the current frame work. If one believes that a 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 kiley and roberts. Kiley and roberts conclude that theres a 30 to 40 chance, that 30 to 40 of the time we will be at the lower level bound. If you assume that every seven years well be in recession and you assume that once we get into recession, rates will be constrained by the zero lower bound for three years one gets that will be at the zero lower bound about 30 of the time given our current frame work. Observation for the if within this frame work, the expected output losses are large. Kiley and roberts estimate an output loss with 1 soft gdp on average, that would be a 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 of a back of the envelope approach. I said suppose that 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 a trillion dollars over the next decade, or 100 billion a year. Calculation could obviously be wrong, if recessions were more frequent, or they were long lasting, or a negative spiral developed or there were histohi you would see how the prediction would be an overstatement, but it seem s hard to argue that wht i have said is way off as an estimate of the cost of the insufficient ability to adjust Monetary Policy. How could this calculation be way off . I have 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 necessary when you have a recession. The main challenge to this type of calculation, it seems to me is a suggestion that alternative forms of stimulus can be provided so the zero lower bound is not an important constraint, because monetary stimulus can 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 10 year rates. If you simply imagine that the economy goes into recession, and then you imagine that the fed cuts rates four or fife times to 25 basis point fed funds rate, and nobody does anything else, the 10year rate will find its way down to 1. 5, or in that range. And it seems to me quite questionable how much extra stimulus would be developed by any further reduction below 1. Percentage Points, thats possible. And that applies with respect to any that argument applies to any monetary device that might be developed. With respect to so in thinking about this event and in what we wanted to accomplish here, what we set out to do was to have Larry Summers make the case why we should think about this, have a number of very experienced monetary economists who have views about what we should do speak about what she would do, and then in this panel, the question was, could we get some people fromdio talk about, so what difference does it make so we have a deliberately diverse panel. John taylor from stanford, well known for his taylor rule, whos been thinking about Monetary Policy for some time. Kristen forbes was recently on the Monetary Policy committee of the bank of england, correct me if im wrong, you never had the chance to raise rates, is that right . I tried. They waited until i left. Peter hooper is the chief economist at deutsch bank securities, to talk a little bit about how this would look in the markets and sarah wibinder who s looked at after all the Federal Reserve exists because congress created it and created it can take away. Sarah and her colleague has a book out called the myth of the fed that traces the history of the Federal Reserve. Im going to have a questioner two, were not going to have the sequential openi ing presentations. So when you did the taylor rule, which is a guide to setting Interest Rates, you kind of assumed that a 2 inflation target is where they want to be. And im curious whether in 2018, given everything you heard, whether you think that was a good idea or whether if you were doing it all over again and you were trying to come up with some normative guide to policy, you would have come up with a Different Number . Its a good question and i i would say i assumed just out of nowhere, a 2 inflation target, there was tremendous amount of discussion for a long time about optimal inflation rate, the zero bound was very much in our minds, measuring inflation, the bias associated with measuring inflation. So what we made thought about price stability and zero inflation, 2 seemed like the best thing to assume. And by the way, that was before the 2 inflation target was anywhere, it just didnt come out of thin air, there was a lot of thinking behind it. Part and parcel to that which is more of an assumption of the equilibrium real Interest Rate and i also assumed that was 2 , that was based on considerations like growth rates. Nobody had thought about at the time, in fact the notion of Interest Rate as an instrument was still foreign to many Central Banks to 2 on the real Interest Rate 2 on the inflation rate, gave a nominal Interest Rate of 4 , which i think is quite good. And Larry Summers explained why that was a number that was useful for many purposes. So thats where it came from, the second part of the question is what would i do now . I dont think theres much difference in what the measurement of the bias issor the central bound. I think the main difference is equilibrium in the Interest Rate. I have questioned onsome of the work being done about that, i have questioned the research, but the uncertainty about our star, a paper with bolker wheelland, sort of the fog of unorthodox Monetary Policy in many parts of the world makes it very hard to estimate our star. I dont think as a given its at 1 or at zero, the fomc thinks about its about 1 now, and thats worth thinking about adjusting, if youre going to have a rule in current policy, i would suggest we lower it a point or two. I have my doubts about it, and i think we should watch carefully about it and i think its most likely to go up in my estimation. I think we should stick with that 2 inflation target. There are many things about that inflation target, choosing it numerically, sometimes theres a wore they that its taking away too much from other parts of policy. And today there was very little reaction of the policy rules. It was implicit in the comments about strict inflation targeting. Of course with the policy rule, you dont do strictly inflation targeting, theres a move towards it, so anyway, theres a worry i have that the extra emphasis the numerical inflation target, so theres some discussion on what the fed should be doing to achieve that target. Ink if we continuing with t the numerical achievement policy, i think we need to pay some attention to the policies we need to actually achieve it. You have had the experience, like some other people earlier of being both an academic and a policymaker. Do you think this think whole framework thing is as important as the speakers on the previous partial suggested . I would say a very clear yesterday, that i think its important not its important for the policymakers sitting in the seats, its very important for discipline for them, but even more important for accountability, transparency for the general public, and any government overseeing you. Let me explain what i mean by that in more detail. So as someone setting Monetary Policy, youre asked to comment on a lot of different things, at the bank of england, were constantly trying to get dragged into the debate on immigration, common fiscal policy and brexit. So theres lots of ways to comment on a lot of different issues. 2 inflationary target is a good target for us, were only going to comment on something if it relates to our mandate, our goal, 2 inflation target. So i thought that was very good discipline for all of us. Intentionally too, i found it very helpful deciding what i would focus on. At the bank of england we would get the forecast a few weeks before we would then meet and discuss the forecast and then determine rates. Theres always a bunch of views in there, different people, different takes, but you cant argument every little point that goes into these huge forecasts so i found it helpful to say, okay, our target is 2 , in one quick scenario, i think this variable should be x instead of y, does that really matter in terms of how we monitor our target poll i. 10 of them are forecast but eight of them are not going to matter, so im not going to worry about those im going to focus my discussion on the points that will actually matter. So my advice is having a simple very understandable frame work is very important. But where i think that frame work was most important, is in maintaining the credibility and accountability of the Central Banks, right now Central Banks have a tremendous amount of power, theyre influencing peoples lives in ways were not aware of as much as in the past. They play very big public rules and they have to be able to explain how elected officials are carrying out the actions they take. I worry about this Going Forward as Central Banks are probably going to be raising rates and people are going to take out a mortgage and realize that its suddenly going to cost more. Banks are going to have to explain why they are raising rates, why its harder to get a mortgage, so you need a very easy framework to get out to the public about why you are doing what youre doing. Explaining them to the public, i do worry is going to be incredibly difficult. There were some polls in the uk when i was there, asking people who inflation was today, and they were often off by 2 or 3 Percentage Points, while they seem very simple ideas, getting them out to the public is hard. I worry about some of this discussion of frame work where is were averaging what happened in the past in the last couple of years, so youre justifying behavior today based on what happened several years in the past and when you go out and explain to the public why youre doing what youre doing, they dont care what happened two years ago, you have to explain what is happening in the environment today or in the immediate shortterm future. For all those reasons, i think frame work is very important, but it also needs to be a frame work thats veryi easy to explan and something very easy to apply to peoples lives today. When you were at the bank of england was there any consideration of whether having an inflation target was a good frame work, whether there ought to be an alternative. One thing the bank of england has done is manage to achieve its inflation target. I suppose we could raise our target bring 25 and have that as well. There was a debate before i started when Governor Carney started whether there should be change, i wasnt part of that debate vm debate. But when i started, 2 was a very good target, a discipline for all of us. And we also told when we started is, the government sets the inflation target, so dont comment on it, dont get involved, dont go public. So that was an easy excuse not to get involved with it. Some other discussion which have had suggests that having a strict inflation target doesnt constrain in any way. And the uk has an even stricter target than the u. S. , its just a target. But my sense being there was we still had a tremendous amount of flexibility. We could look through price shocks, whether it was temporary oil price shocks, whether its medium term shocks such as Exchange Rate move and that affected inflation for it could be three or four years. We could look through that. We could, when there were large output gaps, question could look at that as part of our inflation framework, we usually brought it in in a way that our goal is to meet our 2 inflation target sustainably, a ooh so even if there was a target gap, we could sustain that gap. So there was a way to work in a lot of other considerations. Right as i was leaving, there was more discussion about the speed with which you would turn inflation into 2 and the cost of that. So my sense was that in some ways we had a very strict mandate. And we could work in a lot of other frameworks that we could where bringing in more formally. Peter hoopert, does anybody in the market care about what flamework they pick, nominal gdp, inflation level, inflation target . Turn on your mike. Let me start by giving a disclaimer that my view does not reflect the entire market. Certainly theres quite a bit of interest, i wont say that we put it quite at the level of importance as inside Central Banks at this point, but, yes, theres interest, and the possibility of something happening here is, i think people looking to the likelihood which would see a substantial increase in uncertainty. If it went to the level of raising the inflation target substantially to 3 or 4 , that would obviously open up the Federal Reserve act, thats no longer price stability by any stretch. And that would, i think, raise quite a bit of question as well. Certainly anything any move in that direction, youre raising you are raising Inflation Expectations, but over time, very slowly, people tuned in to the possibility there. And the inflation risk people you me people yu premium. I think a notion in the shift of the inflation target of 3 or 4 , its not likely, people are generally discounting that would be my sense. The view in the markets currently is, if the fed changes their target, they should change it to something achievable, like 1. 5 , which is where its been. I mean there was a question raised at the end of the last session, which i think is a serious one. People in the markets generally dont believe theres a phillips curve, or many, or at least the view that inflation is always and everywhere a monetary phenomenon has certainly seemed to have been violated, there are global forces, there are technological forces, demographic forces, all tending to hold inflation low, even some nice work at the San Francisco fed recently, featuring the noncyclical element of the economy is growing, its now more than 50 and tending to hold inflation down. So its going to be a real challenge getting inflation back, even to 2 , let alone 3 or 4 . So the notion of an inflation target increase just isnt there. If i can talk about the target that seems to be coming through the discussion today is an average inflation target or price level target. Here youre dealing with something that folks would recognize, increasing volatility, increasing price level over time, youre going to have prices over time. That will have to happen with shocks to the up side. That means not only more variance in inflation, but also more variance in inflation, i would argue. Take an example of what if we had adopted this as has been suggested when we first hit the zero bound and we find ourselveses today as we two at 5 below target on inflation. What are we going to do for the next five years, are we going to raise the inflation rate immediately to 5 and have it stay there, and maybe that raises Inflation Expectations, ill say Inflation Expectations adjust slowly, they are adaptive, and its going to take some time to get there, so lets say we do get there, how does the fed achieve that . It achieves it by driving the Unemployment Rate, i think significantly lower, its already below it may go down in the mid threes, maybe lower, theres a lot of confusion in our inflation models and how to get there. But i would like to go back to the 1960s, the last time we had an occurrence sort of like where we are now. We went through the first half of the 60s it was 1. 5 . It reached about 2 percentage point below naru and then suddenly in 66 it jumps by 2, 2 22 1 2 Percentage Points and that was the opening sal voe going into the great inflation. There is a fair amount of work, suggesting there are nonlinears in the phillips curve, when we get down there, are we going to have control going the other way . Is this going to keep us from overshooting. We could relive the 60s, i do think that everybody in Monetary Policy is fighting the last war, but different people are fighting different last wars. You to agree with larry and some of the others that we have an urgent problem here, that were likely to hit the next recession, unable to use Monetary Policy sufficiently to get us out of it. That the risk of hitting the zero dollar is large, uncomfortably large, the natural rate has come down and that the risks of being not reliving the 60s but reliving the last five years are worth thinking about. Okay. Ill observe that the fed has never been able to get the Unemployment Rate up to nair. Soft landings here is pretty remote. The question is how my view is the costs are pretty significant. We need to have better handle on what the cost of higher inflation may be. Yes, there are benefits obviously from the ammunition for policy standpoint. But the balance here is pretty close. I would say rather than jumping into something right away, lets see how it goes in the next recession. Okay . And lets see how it goes in terms of getting us back to nayru. What is our ability to control things here . I dont know. It seems to me a little bit like saying you have this massive heart attack and decide whether they should do coronary bypass and the doctor says why dont we wait until you have another that is not perfect. No, but i cant come up with them like that. I take your point. Im sorry. Sarah, let me give you a chance. So one of the interesting things about the conversation this morning was that every once in a while congress would come into the picture. I think most notably there were some suggests that 4 inflation may be hard to justify with price stability. And thats just in a legal sense, not in the political sense. So i know youve done a lot of thinking about what role does Congress Play in this and how would you look at this discussion we had this morning i mean earlier this afternoon from the eyes of the political realities of central bank in the United States . Sure. So i think theyve been as you said good discussion economic costs earlier today about either raising the target or alternative regimes. But i think with the exception of the ben bernanke no ones really nailed down the political cost here. I would argue politically has to really buy in to raising a target let alone many other more potentially quote unquote radical changes to how it goes about pursuing its mandate. Look at me. Make sure the microphone is on the right side of your mouth. I think the usual objection before i get going here that its good to anticipate is, well, look, keep in mind that stan fisher distinction that the congress is mandate, so, sure, the fed has gold dependence, but then we also say the fed has instrument or tool independence. So why should we worry about any political potential political costs. To put it bluntly, the independence for the fed we could call it a myth. I think three reasons here that help us think about the political cost. First crystallized by bens comment, if the fed pushes too much an expansion nair policy by virtue of changing its target, we could easily see it risk losing half the side of the mandate, the employment side mandate in the first place. But second, either without legislative action its not at all clear on this sort of goal versus instrument distinction. Its not really clear to me target or any gdp targeting where it fits, right . Is the target a goal . Is it an inherent part of the feds price stability mandate and thus changing it is prerogative . Is it a tool for cheating price stability . Of Course Congress has tools, so conceptually i think theres very little autonomy for the fed to making changes. Third, more importantly, set aside conceptual issues think of how the fed got current target. Bernanke as we know from his memoir and reading the fomc transcripts he worked for a decade to convince not just his colleagues on the fomc but also congressional bosses on the hill that the fed should have an inflation target. We hear those constraints for those of us not around the table but are dependent on the transcripts. Don koe, 2008, quote, having an inflation target wont have an effect if its repudiated by the congress. Bernanke in 2010, again, around the table one of the main issues has been whether we could succeed politically in creating an inflation target or whether there would be, quote, pushback from congress, unquote. And of course there was pushback from congress. Bernanke said when he went to the hill in 2009 then chair of the House Financial Services Committee Said this would be a particularly bad time at the height of the recession to target for just one side of the feds dual mandate. Think about it, that was 2009. It took them until january 2012, took the fed three more years little busy during those years. But in any theory of instrument independence, right . When they might have most needed it we might have expected perhaps to move more quickly. But i think whats critical is six years later lawmakers theyre still threatening the fed about the target. Not from the left this time but from the right. Go ahead. Assuming this goes this is jeb hensarling, outgoing chair Financial Services committee thrks is during the last july monetary report the hearing held with janet oops, oop. Oh, no. In a recent press conference some referenced comments you made to indicate you were open to an increase in the inflation target. Are you pursuing an increase in the inflation target . Or other members of the fomc, is this a matter of discussion within the fomc to increase the 2 inflation target . It is not. We reaffirmed our 2 inflation target in january. We are very focused on trying to achieve our 2 inflation target and its not a subject of discussion. Thank you, i will take no for an answer. I mean, that crystallizes the dilemma here. I will take no for an answer. Can we get hensarling . Having him look over my shoulder is not just to think about it, will jay powell be treated any differently than janet yellen was . Obviously remains to be seen or part of it depends on whether the criticism coming was purely ideological in terms of economic or was it partisan because it was a democratic so if the fed decided that it wanted to move to a price level target as has been discussed, is it your view that they will need kind of the at least consent in an informal sense of congress . Thats my not just from judging when the fed has particular tools of changes, the challenge here is im not an economist, but the challenge here is the history dependence. If theres catchup behavior whats going on here but what lawmakers care about is the state of the economy and whether theyll be blamed for things going poorly their eyes will be on the current state of the economy and theyre not going to be pretty wild, i dont think, about numbers of inflation rising on their watch. John taylor, what would you do . Would you give up on this talk of frameworks and try to prove the attainable . So a framework policy rules are frameworks for thinking about the decisions about policymaking. I dont think theres any way to think about it. Its a little more detail than justin flags target. Thats part of it but its not the whole story. So, no, i wouldnt give up on it at all. Seems to me you talk about congress there is a bill which i think this would require the fed to say what its doing on its policy. In fact, if the fed came with a rule of some kind which was price level targeting, what makes you think they would be rejected . They basically would like the fed to say what the fed is doing. If the fed comes in, this is what were doing, well, im sure thered be lots of discussion. But why would you just out say theyre going to ignore r it . I think thats the way to think about it now. I think congress would like the fed to describe its decision on the instruments. Doesnt take any independence away. If it is along the lines that John Williams has said, its hard to see why that would just scratch it out. I do think theres a better way to go about this which goes back to another John Williams and you dont have to change inflation target or price level targeting. You just commit to when the Interest Rate hits zero to keep it as zero a little longer. Its a beautiful way to think about this. Its a description of the instruments. Thats one of the things i would do Going Forward is say heres what were doing and heres why it worked. I dont think you have to go through the inflation targeting change or the price level targeting to hay chief that. It seems to me it is very close or much closer than congress is asking the fed to do. So, peter, do you think the market i wont ask you to speak for the whole market. That wasnt a fair point. Do you worry at all about this our star run rate is low and that we might find ourselves in the position of having a recession thats hard to fight both because of Monetary Policy out of ammunition and fiscal policy is either paralyzed by political gridlock or debttogdp . Or do you think thats just a fairytale that we shouldnt worry so much about . Oh, i think its definitely something to worry about. No question. The question what to do about it . So what would you do about it . For now i would stick with the policy we have, but recognize that it does give you room for flexibility on the upside. Allowing inflation to overshoot into the 2. 5 to 3 range giving you more ammunition when the time comes i think would certainly be wise. Do you think the markets think the fed is willing to let inflation overshoot the 2 level right now . Right now market is having a hard idea getting its head around its going to get to 2 . Fiveyear expectation is about half percent less than the feds 2 target if you adjust cpi to pce. So, yes, i think its getting there would be so why wouldnt the beam in the markets screaming at the fed making a mistake by raising Interest Rates . Were not hitting the target. Youre saying the markets dont think they can hit the target. So wouldnt it follow then that we shouldnt raise Interest Rates . Okay. Well, there are certainly are people in the market who are saying thats going to occur. I mean, market expectation about Interest Rates is substantially less still than the average fomc. John. Yeah, let me just interrupt here. The fact that the inflation rate is somewhat below the target doesnt mean the Interest Rate should be zero. It could be a little higher than zero, it could be one, it could be two. So this notion, i think it was one of the other problems i worry about in inflation targeting is it seems to be if its 1. 5 or 1. 63, oh, my god, we have to put our foot on the floor. But thats not how Monetary Policy should work. Interest rate maybe should be a little lower it should be a little lower than otherwise but not complete full throttle. Chris. You should allow the inflation rate to rise above target, which the Current System allows, but i dont see the need to put yourself into a tight ir straight jacket if you will to having to achieve a certain average over a certain period of time which is more difficult than the current one. Im going to let you answer any question you want, so im going to ask you a question, but dont feel you have to so does the rest of the world. Put down your International Economist for a minute. Does the rest of the world care about the conversation we had here earlier about how the fed is choosing to define price stability under its mandate . Id say yes to different degrees in different countries, but the fed is a leader. What the fed does does set examples for the rest of the world. The fed is highly respected, a very smart group of economists. I know for example the fed the fact theyre kucutting back on , the bank of england were very excited because we could see what happened in the u. S. Economy to get a sense of what might happen when its time for the uk to follow that path. So, yes, the u. S. Is a role model. I wanted to take advantage of your suggestion to jump on anything. There were three points raised earlier i wanted to get in there. First, peter, you said expectations tend to change very slowly. Inflation expectations are very adaptive, very slow to change. My experience is thats not always the case. In the uk Inflation Expectations were quite low especially around 2015 and inflation hit zero and went briefly negative. So Inflation Expectations were quite low, and then we got a brexit shock and sent the Inflation Expectations popped up quite high and now if anything theyre a bit higher than some might be comfortable with. Theyre at historic averages. So we saw Inflation Expectations change very quickly. Im not suggesting a brexit shock and 20 depreciation in the current si currency is a way to accomplish that, but shows how people can change when the situation changes. Another question, david, which you asked, was how big a risk is the zero lower bound. I think thats an important point. I came here, so for all the people whove spoken today, i think a lot of people came here with priors on what the optimal framework is and where we should go and i came here largely to learn without a prior and listen to the cases and try to form my own opinion. And what hit me is i think all of the cases this morning started with the argument, we need to change the framework because of constraints around the zero lower bound, so we just arent going to have the room to operate in the future that we would like to have when the next bad thing happens. I largely agree with that. Especially if you believe the zero lower bound is a constraint, there are big welfare gains from changing the framework. I dont know if larry somers quite as accurate, but there are gains. But in practice where i wonder if the argument is quite so strong is how tight a constraint is the zero lower bound. Here when i start after my own experience in the uk, when i started in the uk i was also worried about the zero lower bound and that also made me more cautious starting a tightening cycle knowing we were so close to the zero lower bound and there could be another negative shock. But then we hit the brexit shock. Interest rates then at 0. 5, so we werent quite at the zero lower bound, but in the uk was could go a touch below 25 basis, but not much due to the structure of finance societies in the uk. So we were pretty much almost at the zero or effective lower bound for the uk. So pretty small, given the predictions of what would happen to the economy but also doing k qe, starting new Corporate Bond Purchase Program and making it easier for banks to pass out lower Interest Rates. So for prime package we did estimates of what impact that should have on the economy. We had a skeptical view of qe or these pretty small packages of Corporate Bond purchases would work, not sure at all how much this program in terms of having banks pass out lower rates would work. And what we saw is this package worked quite well, more effective in our estimates. And i became convinced such as things as qe, asset Purchase Programs can be effective in helping alleviate the constraints around zero lower bound. They did stimulate the economy more than expected. And theres a whole line of arguments that qe only worked because markets werent functioning, they ease liquidity issues and that was not the case. I guess bottom line about that is im less convinced being near the lower bound is such a tight constraint. We do have a whole set of new tools. Those arent optimal tools. I would rather go back to the Old Fashioned way of adjusting interest rating and not using these new tools for sure. But if we are in the situation with the zero lower bound again, i think we do have options. I dont feel as big an urge to dramatically change the framework with dramatic cost because of that constraint. My own point i wanted to make that hasnt come up as much as i expected despite, david, i think one of your mandates to everyone was discuss how their policy would function during all stages of the Economic Cycle. What hit me this morning is most of the discussions focused on this stage of the Economic Cycle or when inflation is too low. Again, in the uk we went through that and very quickly we got another shock and now inflation is too high. Its 3. 1 . So with the committee, not me anymore, is in the position of having to explain why inflation is too high. So i think we have been in a very unusual state of the Global Economy. Euro crisis, and then just as things might have been started to normalize we got the commodity shocks that brought headline inflation down around the world. Not surprising were focused on the situation when inflation is too low. But we forgot theres a whole other set of shocks out there that could hit. And we need to make sure if we do make a change any framework is going to function well in that alternate environment as well. Peter. I stand corrected, kristen. I certainly Inflation Expectations are sensitive to oil shocks, et cetera. Less so in larger less so economies and less so over longer dated periods, but i do think that key question here is what effect do Central Bank Announcements have on Inflation Expectations . At least in the g3 have bank of japan has certainly had its troubles with that one. I suspect that the fed announcement oh, oops, going to go to 4 . Unless inflation had already risen to near that level could be problematic. And announcing something when youre well below it and failing to get there could be really devastating to credibility. John. Your question about international i think is very important. And for the last few years theres been a tendency for Central Banks to follow each other. I think its quite clear the examples i give is japan followed the u. S. In quantitate i easing because the yen was too strong and then mario draghi and the ecb follows as well because the euro was too strong. Both actions changed currencies dramatically and you can see emerging Market Countries all over the world worried about Exchange Rate behavior because of the very unusual policy. So this is a global phenomena. I have great concerns about the Exchange Rate effects. Many people feel that we need to have a more rules based international system. That is not a view of a few people. I think the best way to get to a rules based International Monetary Financial System is for the individual countries to follow that kind of a policy. Inflation targeting, the 2 inflation target has effectively become global. Its what the europeans talk about, british talk about, most japanese talk about it, of course were talking about it. If you move away from that i think almost from 2 to 4 you can upset that its currency issues will come to fore right away. I also think that even more modest changes of the price level targeting, by the way my original work on targeting rules was price level targeting in ancient history if anybodys interested, but we changed that because it had some of the problems people are referring to now. So i think even a small adjustment like that threatens the problem the goal, i would say, of moving towards a more rules based international system. A lot of people want to do that. I think theres an opportunity for it now. Theres more and more evidence coming about the capital flow volatility come from the unusual policies. Europe is talking about moving back, even japans talking about moving back. So i dont want to upset that goal by a change in our policy. Very important. Very important for me to wide a stick to best to what we can. Time for a few questions if anybody has one. Any . Peter doyle here and the woman there. Why dont we start with the woman in the back. One question i had is regarding the framework of Monetary Policy. If Going Forward there is more of a role for say asset prices than just the credit transmission channel, so if the transmission mechanism has changed, how should the framework change . Some of you sort of touched on it with regard to implying unconventional tools might be here to stay, but can you address maybe how the framework could change if the transmission mechanism has changed . Peter doyle . The discussion as i hear it has reached conclusion that every Single Person whos advocating either for the status quo or for a change, acknowledges some shortcoming in their proposal. We have no nobody is claiming universal benefits for their own proposal. What that situation tells me is we pretty much exhausted the possibilities that there are. We now have to choose between, you know, do we think somethings more probable or less probable, that suggests to me we need to also devote as much intellectual attention to assumption which we all share in this debate which is the shocks are acts of god. There is a shock, how do we respond, how does that we need a certain kind of instrument. Weve all taken the same assumption which is theyre acts of god. But theyre not acts of god. These are things which are produced by economic systems and policies. I think we need to devote as much attention to diagnosis to the problems that give rise to these shocks as we are to devoting our attention to policy framework, deal with them and how they happen. I think youre being a little unfair. There was discussion in fact disagreement about whether we had to accept that the National Rate of interest had come down and whether we could do something about it. Which seems to me to be part of the point you want to make. Anybody want to make a point on either direction . The assumption that unconventional policy is here to stay, all right, that we had the bernanke and yellen playbook and we put it on the shelf and break the glass and take it out again. I dont want to make that assumption. I could imagine first of all we know that parts of it have been tinkered with, right . The 133 authority, its not irreparably harmed, but hard to use in the fashion it was used in 2008 i guess late 2007. I would guarantee that Congress Might weighin on asset purchases on the size of the balance sheet, on paying interest on excess reserves, right . Which wasnt immediately part of the playbook. But one could imagine that the set of tools the fed had the first time around assuming its a similar type crisis may not be ready on the shelf or even if there might not be able to take them off the shelf. And keep in mind that also probably assumes that theres a massive tarp but i certainly wouldnt necessarily rule out a wall street bailout that looked in 2008. So these two questions i think are somewhat related because theres the shocks are coming from somewhere else. I agree, studying the best way to react to those shocks is a big question. And there will be more coming, the asset markets. But what i think is we also have to emphasize, and sorry to bring this up, but some shocks are caused by Monetary Policy. I happen to argue that big changes in policy socalled great moderation came because those shocks diminished. Ive also argued that this terrible tragic Great Recession we went through had a lot to do with monetary shocks. Thats part of the discussion. Thats why we want more stable monetary policies. Various ways to go about it, but i agree dont forget that powerful aspect of Monetary Policy which can be very damaging if its not done well. Kristen, did you want to had a couple reactions. First, question on the role for asset prices and transmission mechanism in Monetary Policy. Asset prices are front and center in Central Banks models not because central bankers want to affect the asset market or put equities at a certain level. Certainly not, but more you know changes in Monetary Policy are going to affect asset markets and those changes in asset markets will then effect consumer wealth, Consumer Spending and have real effects on the economy, which is what youre driving. So that it is built in there implicitly. They may have changed, but theres also a lot of other things that have changed in the economy. For the uk there was some modeling we did of how we werent sure given Interest Rates had been near zero for so long what would be the effect of the first change in a long period of time, first the change down and then the change up. At least you can best estimate with all the unusual huge number of caveats is there hasnt been a huge change in how these mechanisms worked. So having said that there has been a lot of other changes in the economy. And this is one another point that i dont think got enough attention earlier today was we dont know where nay rue is in many parts of the world. I was struck, john, when you showed our graph of our star, you show it steady downward trend and then plummets at the time of the crisis and then falls gradually. You said main factors are demographics and couple other things which are largely slow moving. So if most of the factors are slow moving, there are a couple other things you mentioned, but if most are slow moving, why was there this drop off the cliff . Why wont some of that come back . I think we dont know. So theres a lot of uncertainty. Another uncertainty, john, which you hinted at is more and more Monetary Policy seems to be working through changes in Exchange Rates, especially in many smaller economies either in the euro area or japan. So that changes how Monetary Policy is transmitted. So theres a lot of structural changes that have happened. We dont know where things are going to normalize, where things are going to settle. So any consideration of changes in the framework are particularly hard given its hard to know exactly where normal is and how things will settle in. So that again makes me cautious making any changes until were a bit more comfortable with where some of these big structural variables settle until the next shock. Then your comment was you commented youd heard a lot of suggestions and everything had pros and cons. I challenge you to find any Economic Policy ever discussed that does not have some pros and cons. So i actually thought there was something healthy about the debate how most people were pretty candid and not just pushing one side of the argument. We really did hear both sides of all the policies and thats what makes economics interesting. Theres always costs and benefits and you have to weigh them. One quick observation on qe, i cant imagine that if the economys going into a significant recession, jobs are being lost, markets are crashing, congress cant get its act together with any kind of fiscal support that they wouldnt allow the fed to use the tools that has proven to be somewhat effective in the past, the qe. So i cant see taking that off the table. Mortgage backed securities, can they buy any asset that i dont know. But i think it would be at least prudent given the rather pretty tough criticism that came from the far right on the hill about whether the fed had strayed or how far it strayed into credit policy or fiscal policy by buying housing mortgages. I as thinking about a future recession knowing past criticism, i would wonder how broad a range of the playbook would be available. Well, i think were our shop hasnt called it yet officially, but i think we can see a recession in 2020. I cant imagine the Current Administration sitting by the wayside and allowing conservatives in congress to call the shots here. Im not sure which is more heroic, picking date of the next recession or predicting congressional reaction to it. With that, please join me in thanking this panel. [ applause ] were going to move to the next segment which is really important because it seems to me theres a question not only about what we should do but how we should get there. And it may be that we have something to learn from the canadian experience. So i want to introduce John David Murray who was for 32 years at bank of canada 32 or 34 . 34 years at the bank of canada. Last four as deputy governor. He retired three years ago and is now an academic and board member. And hes going to talk a little bit about how the bank of canada has come to have a much more organized process about reviewing the framework. And then eric, the president of the Federal Reserve bank of boston who has been thinking about just that question is going to respond. John, is this mike on . It is. There should be a powerpoint not that one. Oh. There. You can see what i proposed to talk about and for central bankers in the world this is usually make them apoplectic. Partnering with the government. But ill explain what i mean, and it relates to davids introduction. The special way we partnered with the government in canada, and perhaps what im going to relay is somewhat unique and specific to canada. But i think youll find it interesting. And beyond that i also think that there are more general lessons here. So dont want to oversell it. First thing id like to say is in fact standing things on their head a little, when inflation targeting came to canada, it was actually the government that proposed it, not the bank of canada. You might say why would they do that. Three quick reasons come to mind. One of them the most positive perhaps is that they thought it was a good idea. And they thought the reserve bank of new zealand provided an interesting lead. Some encouragement. So thats number one. Number two is that the government was in the process of introducing a new goods and services tax which was going to boost the headline inflation rate quite significantly. And this coincided with a situation where unfortunately they had to negotiate labor contracts with almost all the unions in the federal government. So you can think of them wanting an inflation target as some kind of assurance, some kind of buffer to see them through this difficult period. And the third is sort of a preemptive act that the bank of canada had started on a very sort of aggressive determined track and was out there talking about the virtues of price stability, which i know isnt anything new for a central bank. But this was in a very direct and determined way. Although no numeric target was given as an end point on this, when asked by a journalist what this might mean, the answer was for inflation 4 is not as good as 3, 3 is not as good as 2, 2 is not as good as 1, and 1 is not as good as zero. So effectively dont want to put words in his mouth, we were talking about price stability. So you can think about this as a preemptive act on the part of the government so that in their view things didnt go too far. What was the banks reaction to this proposal . It was mixed. They were positive. They were receptive to the idea of inflation target. They were less enthusiastic about the way the government wanted to go about it. They wanted to aim for a relatively high rate, not high but by that time but say 3 . And then they were thinking of something sort of shortterm. Im going to call it a patch through this difficult period. The banks reaction to this was that it had to be meaningful and it had to be longterm. In the event the bank of canadas view prevailed. What we got in the end by way of the very first announcement in 1991 was an inflation target of 3 for 1992, going down to 2 1995. And a 1 ban to either side of these targets. But perhaps whats most interesting is that this was regarded as only a beginning. That after 1995, five years hence, based on experience this issue would be revisited but with a strong presumption a gain that 2 was only an interesting start and you were going lower. The first renewal of the agreement the bank had with the government, in other words 1995, was to review the experience, but it was related to that thought of in terms of one and done. That in five Years Experience surely well have enough information that will be able to peg the rate the optimum level of inflation for us and that was it. So this was not seen as the beginning of an ongoing process of renewal. Key aspects of the agreement were, this was simply a joint press release by the bank and the government. And it came out as part of the governments february 1991 budget. There is no supporting legislation for this. And indeed thats been the pattern through time. Its public. And that extent has some force but it is agreement between parties. It is a partnership with one admittedly more equally than the other ultimately. The government of canada for a long time its been very clear in the legislation has the power to issue a directive to the bank of canada. If its unhappy about Monetary Policy, it can tell them what to do. This came about in 1967 as a result of events i wont go into. But there are three conditions around that ability. One is they have to be very specific about what they dont like. Two, they have to be very specific about what they want the bank of canada to do. And, three, it has to be published. And theres always been a presumption that if it was ever used, the governor at the time would feel compelled to resign. Perhaps as a result of that its never been used. This nuclear option. What it means is that having that in place is good in two ways, in our view, that it does give ultimate responsibility for Monetary Policy to the government, but it also ensures they cant use it too lightly. And effectively then gives the bank of canada considerable operational independence, instrument independence. Ill speak to this later, hopefully quickly. We actually see the agreement instead of eroding that independence potentially rather enhancing it. Because once youve got the government to sign on, the scope for them to criticize as long as youre actually doing your job becomes more limited. So we see tremendous advantage in this public agreement, and as ill mention in a minute this renewal process thats developed where its refresh every five years. Talked about price stability, the origins of the process. Lets see, have i got this right . Just to give you a flavor of where this was headed initially, the first doesnt complete all of it. Just lays out the specific targets as i described earlier. I i think the last two bullets are more interesting. Thereafter, that means after 1995, the objective would be further reduction in inflation until price stability is achieved. The last one based on a lot of work that the bank of canada had done in advance is a good deal of work is already been done for canada. This work suggests a rate of increase that is clearly below 2 . And you might ask where did that come from . Well, it came from a lot of research. But the three reasons for having an inflation rate above zero at the time for us were not regarded as that material. We had a measurement by us in the cpi, but it was judged to be very low. Presently probably and then half a percent or less now thats not a reason to have a 2 target. We could find some stack kal support for this notion which would be the second argument but our work suggests economically it was not very important or meaningful. And because the great moderation underestimated the significance of the effect of lower bound that was something we thought if it did occur surely there would be means to overcome. So thats where we were coming from at the time. In the event the target was renewed with the government in 1993, i wont go through why, instead of 95, and its since been renewed in 1998, 2001, 2006, 2011, 2016. Its up for renewal in 2021. It was referred to earlier. Despite all these renewals theres been no Material Change 2 maintained at the midpoint. Instead of talking about price stability so often we talk about low, stable and predictable inflation as being the good thing. One other reasons and perhaps the most important reason the 2 target hasnt changed is that the economy seemed to perform so well, better than expected under the 2 inflation target. So that sent a rather high bar for doing anything adventurous. Especially youll note the dates for some of these renewals coincided with episodes in which the economy, the situation was particularly uncertain, 2001 right after the tech bubble, 2011 well into the followed from the Great Recession. Just to give you a flavor for how much things changed on the inflation front, looking good. We actually did so well that the imf and others accused us of covertly price level targeting. And you can see why looking at this graph that might be a reasonable suspicion. The black line shows you a hypothetical price level that has allowed to grow at 2 a year, and up until about 2012, 2014 even were doing remarkably good job. This came as a surprise to us. No, not the good part. Not the good performance. We knew we were doing a great job, but when the imf pointed this out and accused us of covertly price level targeting which is itself a little odd because the major benefit of price level target is advertising so you can condition expectations, as we reflected on it, two things. People have referred to luck earlier and perhaps sequence of shocks that happened to be offsetting or symmetric, more or less. But another thing thats been mentioned and we learn to appreciate its importance even more is our reaction function, which like many Central Banks put a very large weight on Interest Rate smoothing. And if you think about that, that already introduces quite a bit of history dependence and you are inflation averaging unwittingly. You might as well take credit for it. Quickly, the advantages of a regular renewal process, you might say whats the point if you dont change, but theres a lot going on underneath, is what ill maintain. The first that we believe this is a critical part of our accountability. That this is a critical element of our fiduciary responsibility to canadians to ensure on a regular basis that we are working under the best possible framework for them. Second, its a way of diffusing potential problems. By that i mean if this is a once in a lifetime event, oh, theyre going to renew the target and things might change, theres a lot of excitement around it. But if theres a regularity to it, this is business as usual. You diffuse a lot of that. Were just taking care of business for you. Next, it promotes oh, wait, deliberate and transparent mechanism to engage stakeholders get feedback. This is terribly important, the Transparency Part in particular. When the bank of canada renews the agreement with the government, this isnt the product of some sort of secret discussions between the two. This is something that is initiated quite early on, and the bank of canadas very careful to lay out the issues it proposes to address. The changes that it might consider and to invite feedback from the public, from the government of course, from academics. And its the beginning of a sequence of often conferences as part of this process. So the transparency to our mind is very important in terms of the credibility and buy in. And thats a way of promoting Public Awareness and understanding. Its a driver. Kristen mentioned this, a driver for more focused Research Effort within the bank. And something new has actually been learned on every occasion. Its not as though we find it isnt deepening our understanding of the economy or the Monetary Policy process, nothing has changed, but things are going on underneath. Possible this advantages some have argued that by renewing every five years perhaps youre not going to anchor Inflation Expectations if the market thinks every five years is a possibility youre going to change, Inflation Expectations might not be well anchored. Ill show you some counterevidence in a minute. Theres increase scope for unhelpful interference. This has been the topic of, sarah, a lot of people today. And thats true. There is a risk. Could say wasted time and energy. I mean, if nothing really changed in the end, whats the point . And then you related to that trying the publics patience sort of announcement fatigue. Oh, were going to renew, were going to renew, oh, 2 . Did i mention that . Counterarguments, theres absolutely no evidence for canada, very little of fragile or unanchored Inflation Expectations as a result of this. Its actually a mechanism for enhancing the Central Banks independence, we would maintain. And its important confirmation of the framework soundness. Even if nothing changes, the fact that you are confirming that in your view we are where we should be is important. Inflation expectations, thats just to show you this is based on two and threeyear Inflation Expectations. You always get a little movement, but theyre remarkably stable for that term, one to three years. Im near the end. Quickly, what are some of the issues the bank of canadas examined in the last 27 years . I divide them into two categories, fundamental and then sort of housekeeping, or operational. The fundamental ones, which weve always looked at should the inflation target be lowered, that occupied everything right through to the 2011 agreement. Its only in 2016 that the question was turned and should we raise the inflation target . In the end we didnt. And i can explain why, maybe ill do it now, very quickly. Thered been this predisposition towards lower is better starting at the beginning. And this had sort of receded a little. But there had always been a sense that lower inflation something close to price stability would be better. And price level targeting held a lot of attraction for some of us as a way of achieving a lower inflation rate while dealing with the effect of lower bound. If price level targeting works, it actually reduces the swings in inflation and output in Interest Rates. You need much less by way of Interest Rate movement to stabilize the real economy and inflation. The key is communications and credibility. People have to know what you want to do and believe youre going to do it. That could be a big if. Would price level targeting be better . As i mentioned a lot of us thought, thats interesting. How much recognition to give to Financial Stability considerations . Leaning, do you want to modify your reaction function in a way and give that recognition your framework . We asked that as part of the 2016. And the answer was probably not much. That wed already gone on record in 2006 speaking about leaning and its potential advantages. We refreshed that in 2011 and addressed it again in 2016. 2016 we actually stepped back a little whereas in 2011 we said, oh, it could be a fourth line of defense. That if supervisors and regulators werent doing their job, thats too bad. If macro prudential tools didnt appear to work, if investors werent being profited enough, or institutions, thats a fourth line of defense if you really had to you might lean. But by the time we got to 2016 wed been influenced by the work that shows there actually might be a negative benefit that to leaning, you do more damage than good. So dont go bank didnt quite run away from that in the latest renewal, but it was sort of easing back. Operational housekeeping matters, cpi the best index still, thats the one we do target. And we favor that for a number of reasons. Best measure of core inflation, thats changed a little through time. How important is measurement bias and we confirm every time that it isnt something bigger indeed because of some changes that have been made by statistics canada. Its a little smaller. It wasnt big to start with, and its smaller now. Looking ahead, this is my last slide, next renewal set for 2021. Bank of canada already mapping out a Research Agenda for the next five years. The final questions have not been determined yet or else theyd be advertised. But they intend to take a broader sweep this time, instead of just looking at the objectives or the framework per se, but to also look at tools in more detail and communication. Old issues will almost certainly be revisited, other new initiatives will no doubt be added. Here in terms of the fundamental issues, while weve done ive retired, i shouldnt say we. While the bank of canada has done a lot of work on lowering inflation its advantages or costs, price level targeting, while we talked about it did some work, we didnt talk about nominal gdp targeting. And i think that is going to be revisited in level form as opposed to growth rate. I cant be sure. This isnt based on information or inflation averaging or instead of we already inflation average, we happened to pick a 12month period for that. Do two years or three years or like australia over the cycle, and as i mentioned earlier we already do it kind of with our Interest Rate smoothing and the reaction function. So thats some of what will be looked at. But the main takeaway i want to give you is that the bank of canada really values this renewal process. And it doesnt become sort of a dog fight between the central bank and the government. Maybe thats an unusual situation. Now, you may argue thats fine. You may argue that you cant take much comfort from that because weve never proposed a major change, why would the government sort of be nasty or push back . And thats fair argument. But turning that on its head a little, i can say from my experience i am not aware of the government ever pushing us to do something or to change Something Like wouldnt a little higher inflation be nice for everyone. So the fact that that question was raised in 2016 and examined isnt at the behest of the government or anything, you know, take it easy. No. That very much the bank has been carrying the load on the proposals, the proposed changes and the research, bringing the government in at the end. It is a partnership. And obviously they have final, final say to a degree. But theres a lot going on. Ill end with this, what did i mean by a lot going on underneath . Although we didnt change anything major. You can see where we started there was a strong presumption that we were going lower. We had research to support it. 2 was nowhere near price stability. And price stability would be of tremendous benefit to the economy. The effective lower bound doesnt matter, the first two really havent changed materially. The third one based on experience has gained more importance. Where i think we come out in the end is that the painful experience shouldnt call it painful, the experience with the Great Recession, unconventional Monetary Policy, which we still believe works effectively you just have to try harder, sort of gave us a slight a different view on the importance of the effective lower bound. But i think the bank of canada just reached a point where it made it happier about 2 as opposed to revising its feud about how high it needed to go. Feel the unconventional tools are effective, the feel that fiscal policy could play more of a partnering role in desperate situations, hopefully, so youre not on your own. It doesnt become a headwind instead of a tailwind for you. Just a number of things. And also this view, this judgment that its a little early to call a big change in the neutral rate. And i like the point that was made based on John Williams graph that, sure, its been going down. People are in the habit of saying, oh, its been going down 25 or 30 years, maybe a little because of demographic things, but it didnt fall off a cliff because of those. And to take that as your base now, oh, its a random walk from there, i dont know, that seems a little presumptive. Anyway, ill stop. Thank you. So now were going to turn to Eric Rosengren who im sure will Say Something that was said earlier at a lunch we had that maybe all thats different is the canadians are nicer so they can do this. Thank you very much. So let me just put johns very nice presentation in the context of this conference. So this conference started by larry somers talking about the fact that very low Interest Rates for a long time were both quite likely and quite costly. The second panel then talked about what are the possible solutions, giving a number of different frameworks that would make that less likely or less costly. The third panel put together a group of stakeholders and talked about more broadly how the various stakeholders should care about this issue. And this final panel is really to talk about process. So i am going to talk about process in this panel rather than necessarily go into details about the various proposals that have already been discussed. So we heard what bank of canada did. And i think it was a very clear presentation. So thank you very much for that, john. And i want to put it in the context of how applicable is this to the United States. There are a lot of differences between the United States and canada. And ill start with and well s different framework. We have a dual mandate, its maximum sustainable employment. And stable prices. Weve explicitly defines the price part of that, to be a 2 total pce inflation. The maximum appointment, we didnt provide a numerical target because it was viewed the natural rate moved around. How two we deal with the fact that when were missing on those two elements of the mandate, we take a balanced approach. This is the operating procedure we should be using. Each january, the committee reaffirms the framework, we have the potential every january to make changes. To date, those have been relatively modest, at least in terms of the overall framework, its been pretty consistent over time,ed main change was to emphasize the fact that we have a symmetric inflation target. Theres no equivalent the in terms of what the bank of america does. We do have a private discussion at these january meetings, its a small part of the overall part of the meeting. We dont have a Research Agenda over a fiveyear period. First, the congress a. M. Mandate that we have hasnt changed. So why should we think about a framework that changes when our dual mandate doesnt. There are a couple reasons we should think about that. We started with an inflation target around 2 . There was a lot of work done both in the United States and abroad. And most most Central Banks have picked a target that is close to 20 . We didnt think we were going to hit the zero lower bound very often, we didnt think it was going to be hard to get off the zero lower bound. Whats different about thinking about it at this juncture, we have been through this period of extended low Interest Rates, not only in the United States, but in europe and japan as well 37 we have very slow productivity growth. All those would tell us its quite likely were going to have low Interest Rates as long as those conditions hold. In fact, while we in our initial framework, thought about inflation being constant. You could argue the optimal rate of inflation that the optimal level of inflation shouldnt be constant. It should be moving around so its not just the appointment part of the mandate that may change over time, it may be that the inflation part would change over time weve been almost every major developed country around the world has hit their target over the last ten years. Not because we havent tried to get inflation up to 2 , there have been aggressive actions taken in the United States and at major Central Banks around the world despite those best efforts we havent been able to hit the 2 inflation target. I would say like john, i do expect over the next couple years we will the 24ird factor we have to think about is fiscal policy, fiscal policy, gives us less of a buffer. And fiscal policy, just like we might have less of a buffer on Monetary Policy. I think weve heard different opinions and different panels today. Theres disagreement about exactly how effective these nontraditional policies are, i think whats clear is, we didnt get back to full employment and 2 inflation target as quickly as some people had hoped. The tradeoffs between the goals and optimal level of the goals may be different over time. Maybe they should be talking about that in a more concrete way. The bank of canning de has a periodic assessment. And i believe they think about input. It does make sense. Its opportunity to think about whether economic fundamentals have changed in a significant way. We should think about what are the best ways to think about satisfying the economic mandate. Are we meeting the framework that tries to addis the guidance that congress has given us. The bank of canada experiences you dont have to change it very often. Theyve made few changes. Thinking periodically about the cost and benefits. Including the cost of transitioning. What are the longer run implicati implications, how likely would it be that we are hitting the zero bound for extended periods of time. What would we reassess. There were a number of different proposals that were laid out. Having a more concrete discussion as well as people inside the Federal Reserve, we could think about whether the optimal inflation rate does change over time. We should be thinking of a fixed inflation target. I think there are ways to think about flexibility than what we have with our target. One of those futures is obviously the political economy that was the topic of the previous panel. Canada has a parliamentary system, we have a checks and balances system. That may mean some of the lessens may not translate perfectly. I think it is important. How do we best enforce while any kind of significant change should involve consultation with congress any change in our framework does require a broad discussion, but also a discussion with congress to make it clear this is what were thinking of doing. My own personal preference would be to conduct the fiveyear review. We should give a little thought to having a certain frequency in which you have this discussion. Its also probably useful to have the possibility to call for an earlier review, if you pick longer periods of time. Weve learned things from the Great Recession given all the things that have transpired over the last decade. Clearly, i think its an approach that there are a variety of perm takings. Its an attribute that i think has a bit of value the bank of canada has a process, as ive gotten older, ive gotten a better appreciation for the fact that having these kinds of processes and governance does matter, it gives you an opportunity to have discussions you may not have otherwise, its a good way of communicating with the public more broadly about what youre doing and why youre doing it. The cost of hitting a lower bound should cause us to have a reassessment. We might like the bank of canada choose not to do anything. The Great Recession was a big enough event that we should have a period that we reassess and say, we need to make sure we dont have those kinds of events. Theres no reason not to reflect back and ask on Monetary Policy, is there anything we should think about. Having a process that can examine the Monetary Policy framework would be an improvement. I think theres a lot of positive attributes. I think we would have to think about how that fit into the u. S. Framework. I think it none the less is an instructive lesson we should give support to. John, does the bank of canada come up with and publicize the research questions. How does that get started . What happens over the five year period. I tried to give some flavor for that in my presentation i think its the bank of canada that does the running, the proposal. And for questions to be asked, changes that might be reasonable, we do give the government a little heads up before we before they come out with the list. Just so we know. Theres nothing surprising about that list that it would be hard for the government to say no. We dont want you to think about any of these things. They may resist doing it. What has happened through time is, i guess what we thought of initially as a one off you know, one and done, and then we know forever quotes. What the rate should be. That continued for two or three renewals, where we always thought, the next one is going to tell us, that another five Years Experience helping us test the waters, see whats happening. Then well know. Id say by 2001 anyway, we views changed on some things but recognition was given at that point to there may be some benefit to this repeated exercise. And since then its something we take quite seriously and its something we map out quite carefully. Its not like we spent five years looking at nothing. But the inflation target renewal. But it provides a road map for our research and other people who we hope will join us. The questions are made public . Yeah, the discussion and the papers are public . Theres a website set up does anybody Pay Attention . I mean, did the market i didnt mean that, usually i mean what i say, in this case i didnt. Do you get a lot of attention in the press and from the markets. Is it like jackson hole or its not like jackson hole. We have good economic reporters in canada. The market is aware and follows that, and i think as ben suggested the public large probably dont live and breathe, if it should change. The chattering classes, the opinion setters, it does matter. Is there some initial inertia . Or is it a fear of what the markets might say . Or is it just maybe the time wasnt right, but now it is . Whats your sense . Theres nothing that prevents us from doing it. Any one of those could be doing what the bank of canada does. Theres nothing institutionally that prevents us from doing it. When you dont have a regularized process, theres inertia in any bureaucracy, i dont think the central bank is different than any other governmental this is a process that is forcing a discussion, and it hasnt been our tradition. It didnt start out at the bank of canada either. I think its more you certainly in the middle of the crisis has been highlighted theres so many other things that youre worried about, and it would be difficult to communicate to the public more broadly why youre doing it in the middle of a crisis. Once youre out of the crisis, you have a little more perspective. Its easier to have that discussion. The idea when youre close to full employment isnt a bad time to be reflecting. I think one reason for you having this conference. Weve had enough time to develop to say that maybe we need to think about Monetary Policy and fiscal policy buffers. Soy think there is an opportunity to do it if there was a willingness too do so. I promise to read your speech later in the week, i want to understand what youre talking about. Instead of saying we have a 2 inflation target we have a range of 1 to 3 or 1 1 2 to 2 1 2. How does that make things better. You can decide we want to be a little higher or lower . Lets say you took an inflation range of 1 1 2 to 3 . You probably dont have to worry about hitting the zero lower bound as much. If youre in a period where the labor force is growing slowly and productivity is weak, youre worried about hitting the zero lower bound is much more likely in the next procession, you may choose to be higher in that inflation range. So it gives you a little more flexibility to say the optimal inflation rate isnt fixed over time. It actually isnt going to be its not like picking a 4 or 5 , which is the numbers that some people have picked. So i think if you think that the population growth and immigration and productivity are going to stay contact, you wouldnt make any changes. If youre in a world where those things can change, and sometimes do change, saying that having the exact same inflation rate, regardless of whats happening with productivity, regardless of whats happening with population growth, regardless of whats happening to immigration there is a enough fixing of the inflation rate that youre going to get a sub optimal result. Having a little wiggle room, without having it so wide, that you have to worry about its different than the price. We will disclose were headed toward the high end as an objective . Were still following a dual mandate, we have a range that says, were going to factor in a little bit more about what is the likelihood, we hit the zero lower bound. There is a cost, if we hit the zero lower bound frequently, and very hard like Larry Summers did discuss. And i think were in an environment right now, where were likely to have fairly low interest ritts, i think we havent talked a lot about what the costs are, larry gave some numbers. I think Monetary Policy effectiveness is not nearly as were not we cant get out of that situation as easily as we have thought, in fact the fact that neither europe or japan have gotten out of that situation yet kits how difficult it can be. So i think we have to take that and think a little bit about, what does it mean, if once you hit the zero lower bound, you may be there for a prolonged period, what does a prolonged period mean . There are income inequality issues, a difference between savers and investors. Lots of things you have to think about in terms of Financial Stability. If you have long periods of very low Interest Rates. I think factors those in should give you flexibility in your Monetary Policy framework than we currently have. The bank account is reviewed. The other question is, for both panelists. What are the inflations. I wont be very original, its repeating the arguments we laid out early on it just relates to equity, and being fair to people. You know that a large part of inflation is regressive. Often the poorest have a difficult time than those who can accommodate it more easily. Some of it is efficiency arguments that while there isnt a big difference between 2 and 3 or 2 and 4, but in terms of what it does to inflation and uncertainty looking ahead, its enormous, even with 2 inflation price levels double every 35 years. And for many people, that kind of corresponds to their retirement period. So you have more uncertainty about the the economic environment, where as summer closer to price stability provides more certainty. It contributes at the margin to better decision making, better planning than youd have otherwise, so its sort of this equity efficiency, sure things would work better notion. I dont know if that answers the question, i think thats where a lot of some of us would still be. There are offsets to that, those were mentioned. The bias in the measure, hitting the effective lower bound, but did you have in mind there would be a deal yeah, please. In a range of 1 1 2 to 3 , i dont think most people are going to notice. So weve been undershooting for most of the last five years, if we had exactly hit 2 , i think the world would be dramatically different, probably not. So i wouldnt want to pick a range thats much higher, but i do think in that range it would be hard to argue there would be big differences between a 1 1 2 and a 2 1 2. Where i would worry is, where i hit the zero bound. Depending on what else is happening in the world. If im in a world where the labor force is growing slowly, and we have low productivity, and im picking a number of 1 1 2, as larry said, youre going to now have an Interest Rate thats going to be not high enough that the next time you have a recession, youre almost certainly going to hit the zero lower bound. Thinking about, frequently, if we have to drop Interest Rates, but we dont have enough inflation plus the real Interest Rate to get to the level before the next recession hits, there is an issue about how frequently you want to be in that situation. Did you anticipate a role for congress in this canadian style review . I wouldnt argue for the canadian style review, i think the Federal Reserve could have a broader discussion about our framework, and why we think its the appropriate framework, as part of that there would be conversations. Weve had this extensive discussion, done a lot of studies and this is why our interpretation of the dual mandate is that were not following it i think it comes out from the discussion how different the political economy context is, there are some risks involved. In a higher profile, more open process here that may not exist in canada, or at least to the same degree. What is it we cannot achieve by interpreting the existing inflation target more aggressively. There are costs to having a review, and there are risks that instead of being a technical discussion, it becomes a partisan political discussion. It seems like bank of canada gives us an example, that doesnt necessarily have to happen. There are costs to having the wrong framework, and those costs are the ones that Larry Summers and others this afternoon discussed. I think there are other ways you can broaden it out, so just for example the example of taking an average over a longer period of time has some attributes of that, i think it does help to actually talk about it in a public way, communicate it clearly. Whatever your framework is its going to make a difference for policy. Im going to have a different policy prescription. When im thinking about my Monetary Policy and what Interest Rate is optimal, its within the framework we adopted in january, if we had a price level target right now, i would not be recommending the same monetary prescription as the current framework we have, to the earlier question kristen was talking about, frameworks make a big difference, because our policy paths would be different. How much risk youre willing to take for inflation being above 2 or above 2 for an extended period of time. Would depend on which frameworks you thought was the appropriate framework. Its important to have an agreement on the committee and with congress. The public more generally about what the framework should be, and then its our responsibility to follow that. So one of the measures of a conference like this, people ask you, so what did you learn. Usually i have to think about this for a while to decide. One of the things ive learned today is that there are moments at which asking questions like this, feel really appropriate, and this certainly seems to be such an appropriate moment. I want to thank all the large number of people who participated today, and as i said, we hope to synthesize this. I have a feeling this is a conversation that will be ongoing, and probably with increasing vol 50u78 over the next year and a half or so. Id like to thank the hutchings center staff for helping us put this together. I want to thank the people who sat here for over four hours to talk about monetary frameworks, youre my heroes. If i could have your attention tomorrow, here on cspan3, the Senate Finance committee will hold a confirmation hearing for alex azar, hes replacing former secretary tom price, who was fired for taking expensive private jet flights and billing taxpayers for them. His confirmation hearing is tomorrow at 10 00 a. M. Eastern, well have it live for you here on cspan 3. The cspan bus continues its capitols tour. Well speak with state officials during our live washington journal program, follow the tour and join us on tuesday, january 16th at 9 30 a. M. Eastern. Our guest is North Carolina attorney general josh stein. The Washington Institute for policy, hosted a discussion on u. S. Policy in the middle east, well hear from National Security officials from the obama and bush administrations about the influence of iran, anticorruption efforts and the trump administrations approach to the region. Welcome to the Washington Institute, im