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John Taylor

John Taylor

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University. He formerly served as the Director of the Stanford Institute for Economic Policy Research where he is currently a Senior Fellow. He is also the George P. Shultz Senior Fellow in Economics at the Hoover Institution.

Articles by John Taylor

ECB Watching

April 9, 2017

Hundreds of financial market participants and news reporters showed up for the 18th annual “ECB and its Watchers” conference in Frankfurt last week. I was one of the speakers as I was at the first conference in 1999. It was a good day for talking about policy with candid questions and answers.  ECB President Mario Draghi led off with a review of current policy; I followed with a talk about asset purchase programs (my assigned topic), and for the rest of the day we listened to presentations and discussion of unconventional policy, structural reform, international coordination, and an enlightening debate between Volker Wieland and John Williams on the “neutral” real interest rate moderated by Sam Fleming of the FT.
The previous time I spoke at this event in 2014 I examined the implications of the Fed’s large-scale asset purchases from 2009 to 2014. I argued then that the purchases did not lower longer term rates except for possible signaling and temporary announcement effects, and I pointed to ten possible negative unintended consequences:
Distortion of price discovery in markets
Unresponsiveness of long-term rates to key events as in normal times.

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It’s Time to Pass the Financial Institutions Bankruptcy Act

March 23, 2017

Today the House Judiciary Subcommittee lead by Tom Marino held a hearing on the Financial Institution Bankruptcy Act (FIBA) which lays out in clear legislative language the “Chapter 14 type” reform proposals that Stanford’s Hoover Resolution Project have been working on since the financial crisis. Based on this hearing, which included top legal experts familiar with the bankruptcy code, including Bankruptcy Judge Mary Walrath, I am optimistic that the bill will become law soon.  The written testimony of all of the witnesses, including me, can be found here.
As I stated in my opening remarks at the hearing, FIBA, which adds a new Subchapter to Chapter 11, is an essential element of a pro-growth economic program.  The legislation makes failure feasible under clear rules without disruptive spillovers. It would
help prevent bailouts
diminish excessive risk-taking
remove uncertainty associated with an ad hoc bailout process
reduce the likelihood and severity of financial crises and thereby lead to stronger economic growth.
Chapter 11 has many benefits, including its basic reliance on the rule of law, but for large complex financial institutions it has shortcomings because it is likely to be too slow and cumbersome to deal with runs on failing financial institutions.

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A New Hearing and, Possibly, a New Phase in Monetary Policy

March 17, 2017

Today’s hearing of the House Monetary Policy subcommittee—the first of the new Congress with the new chair Andy Barr from Kentucky—provided a good opportunity to discuss policy in light of new and different decisions by the Fed, new and different speeches by FOMC members, and of course a new Administration. I testified along with John Allison, Marvin Goodfriend, and Joshua Bivens. It was a good, candid hearing, which moved reform efforts forward.
Though it may seem like a long time ago, it is crucial to remember that it was back in 2003-2005 that the Fed departed from the policy of the previous two decades of good economic performance by holding the federal funds rate “too low for too long.”  Along with a breakdown in the regulatory process, this policy decision was a key factor leading to the financial crisis and the terribly high unemployment that followed.  It is telling in this regard that Josh Bivens, in his more positive assessment of recent monetary policy at the hearing, did not even discuss the possible role of policy leading up to the crisis and the large increase in unemployment.
After the panic in the fall of 2008, Fed policy moved sharply in an unconventional direction. The Fed purchased large amounts of U.

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Milton Friedman on Freedom: A New Book

March 4, 2017

Milton Friedman on Freedom is a delightful new book of Friedman’s best works on freedom compiled and edited by Robert Leeson and Charles Palm.  It is a delight to have these writings in one lean volume, and the book also highlights a new and much larger on-line collection of Friedman’s writings, recordings, correspondence compiled by Leeson and Palm at the Hoover Institution.
Both the book and online collection are sorely needed now. People often channel Friedman to support their own views, even if they are contrary to his actual views!  So he deserves to be read in the original, and readers will find the book refreshing even if they are already familiar with Friedman.
Leeson and Palm arrange the essays chronologically, starting with one of Friedman’s first articles on freedom from the 1950s where he notes that liberalism in the classical sense “takes freedom of the individual—really, of the family—as its ultimate value.”
Friedman wrote often about the connection between economic freedom and other freedoms, and he believed that “economic freedom, in and of itself, is an extremely important part of total freedom.”  What we sometimes forget, however, is that he thought that the loss of total freedom caused by restrictions on economic freedom were as much a concern as the loss of economic prosperity caused by such restrictions.

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Economic Policy Explains Growth Conundrum

March 2, 2017

“Growth Conundrum” sets the theme for the many fascinating articles in the latest issue of the IMF’s quarterly magazine Finance and Development which includes an opening essay by Nicholas Crafts and a profile of Kristin Forbes. I was asked to write one of the articles summarizing my recent research on the recent slow growth in which I have been critical of the secular stagnation view. In this post I reprint that article, but also add references to articles and papers by me and others providing relevant background and support, which I could not put in the published article due to understandable space constraints.
The article is one part of a two-part “Point-Counterpoint: Secular Stagnation” in which Brad DeLong takes the other side. Brad has already responded to my article on his blog, but he apparently did not have the benefit of these references and he was completely off point in his counter point to the magazine’s point-counter point.
Here’s my article from F&D with the additional reference notes in italics:
Policy Is the Problem. Secular stagnation has been the subject of much debate ever since 2013, when Lawrence Summers proposed the hypothesis “that the economy as currently structured is not capable of achieving satisfactory growth and stable financial conditions simultaneously.

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Restoring Prosperity

February 11, 2017

During the past two days, economists from around the world gathered at the Hoover Institution to focus on the crucial problem of how to restore prosperity. They took stock of lessons from past experiences in the US and Europe, and considered possibilities with a new Administration in Washington. It was a follow up to a conference and book that Lee Ohanian and I organized 5 years ago with Ian Wright. This year Jesus Fernandez-Villaverde joined with Lee and me in the planning, adding important economic and political perspectives as well as views from Europe.
Needless to say, the need to restore prosperity is still with us, as illustrated by the chart on this cover of 2012 book (Government Policies and the Delayed Recovery) along side the updated version today—the employment-to-population ratio is still barely above the level at the end of the recession in 2009. We have go a long way to go.
A huge amount of useful new facts and ideas were put forth at the conference so a book is again planned. The conference was also notable for topics that did not come up. No one suggested secular stagnation, as introduced by Larry Summers in a 2013 Hoover-Brookings conference, as a factor in the recent slow growth. Nor did anyone suggest demand-side fiscal stimulus packages as a means of restoring prosperity.

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Benefits of Comparing Policy with Reference Rules

February 5, 2017

In a recent VOX article, Henrike Michaelis and Volker Wieland write favorably about the approach taken by Fed Chair Janet Yellen in a recent speech where she compares recent Fed policy actions with several monetary policy rules—including the Taylor rule—much as would be required by recent legislation in the U.S. Congress. They argue that these kinds of “comparisons of Fed policy to simple reference rules show how such legislation would serve to bolster the Federal Reserve’s independence…. By referring to such legislation and appropriate reference rules, the Fed would be able to better stand up to … [political] pressure and more effectively communicate its reasons to the public.”  The article also refers to this statement by economists supporting the legislation.
As an illustration of the kind of constructive criticism that would likely be the healthy outcome of such comparisons, Michaelis and Wieland also take issue with one aspect of the Fed Chair’s comparison. They show that the comparison is incomplete, and thereby potentially misleading, because it uses only part of recent research by Holston, Laubach, and Williams (HLW).  The comparison applies the shift in the equilibrium interest rate r* from HLW, but not the associated shift in potential GDP that is an integral part of that study.

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Monetary Policy Strategy Statements Should Have a Strategy

February 3, 2017

At its meeting this week the Fed decided not to post changes in its “Longer-Run Goals and Monetary Policy Strategy” as might have been expected as part of its annual organizational meeting actions as it did last year at this time. The January 2016 statement is still on the Fed’s web page.  Maybe they will make changes at the next meeting, and, in particular, add some words about the Fed’s strategy for the policy instruments.  Despite the use of the phrase “Monetary Policy Strategy” in the title, a strategy for the policy instruments does not now appear in the statement. If you read the statement you will find nice clear sentences about goals, but little in the way of a strategy for the policy instruments to achieve the goals. As former Fed Staff member Andy Levin explains in a chapter in a recent book “the FOMC’s Statement on Longer Run Goals and Policy Strategy is almost exclusively aimed at clarifying its longer-run goals…what’s still missing—and what’s desired by the general public as well as academic economists, market investors, and members of Congress—is for the FOMC to explain its policy strategy more clearly.

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Good Progress on Describing and Comparing Monetary Strategies

January 23, 2017

Janet Yellen visited San Francisco and Stanford last week. She gave two interesting talks about monetary policy, which together, in my view, break new ground, and are worthy of more discussion.
At the Commonwealth Club in San Francisco she briefly described the Fed’s monetary strategy for the policy instruments.  At the Stanford Institute for Economic Policy Research she compared the Fed’s recent monetary policy with the Taylor rule and closely related monetary policy rules.
If you view these two talks together, I think they resemble what would be required under the Requirements for Policy Rules of the Federal Open Market Committee, Section 2 of the Fed Oversight Reform and Modernization (FORM) Act which has passed the House of Representatives. That legislation requires that the Fed (1) “describe the strategy or rule of the Federal Open Market Committee for the systematic quantitative adjustment” of its policy instruments and (2) compare its strategy or rule with a reference rule. More detail here.
Let me explain why the two talks represent progress in both directions. In the San Francisco talk, Janet Yellen summarized the Fed’s strategy for the policy instruments, saying that
“When the economy is weak and unemployment is on the rise, we encourage spending and investing by pushing short-term interest rates lower.

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The Room Where It Happens

December 22, 2016

I enjoy the nexus between the world of ideas and the world of action, probably because I have gone back and forth between those two worlds several times as described here. There is nothing more rewarding then developing ideas and then having the opportunity to bring them into action. The song “The Room Where It Happens” in the musical Hamilton is a wonderful rendition of this nexus where Alexander Hamilton gets his debt ideas into action.
When asked by the Wall Street Journal and Bloomberg News about by favorite books for 2016, I chose books that fell into this nexus.  For the Wall Street Journal list, I chose The Man Who Knew, Sebastian Mallaby’s excellent biography of Alan Greenspan, and War by Other Means by Robert Blackwill and Jennifer Harris. Here are the reasons that I gave and that the Journal published:

For Bloomberg News I chose The Euro and the Battle of Ideas by Markus Brunnermeier, Harold James and Jean-Pierre Landau (I also wrote a longer review here) and The Curse of Cash by Ken Rogoff.

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Show Us Your Model and Your Method

December 22, 2016

In a Wall Street Journal op-ed today I addressed claims made by Neel Kashkari in an earlier op-ed about rules-based monetary reforms, showing that his claims that the reforms were mechanical or computer-run were simply false and misleading.
Kashkari mentioned the Taylor rule a lot in his op-ed. For example, he reported that “my staff at the Minneapolis Fed,” found that unemployment after the 2008 financial crisis would have been higher with a Taylor rule. However, he gave no reference to the study, its methodology, or even its authors, unlike many other Fed officials who write or speak on policy. In my response I cited research that got opposite results to those reported by Kashkari. That research is published and publicly available.
So many people have asked me:  What model did Kashkari use, and how did he use it?  I hope that someday the Minneapolis Fed study will see the light of day, but in the meantime we do not know the answers. From the op-ed it sounds like the staff did an old fashioned “alternative path” simulation with some model rather than a more realistic “alternative rule” simulation. (For an historical review of the old and new models and methods, see my recent paper for the Bank of Canada.) Thus the calculation did not take account of expectations or other systems effects normally considered essential when evaluating policy.

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Unconventional Monetary Policy, Normalization, and Reform

December 10, 2016

This week the Monetary Policy Subcommittee of the House Financial Services Committee held a hearing on “Unconventional Monetary Policy.”  Charles Plosser, Mickey Levy, Simon Johnson and I testified. It was a good hearing with pertinent questions by Members of Congress, led by Chairman Bill Huizenga, and candid answers from the witnesses. In my view the hearing was good because it focused on monetary reform in a practical context where reform is now seen as a real possibility. Here’s a link to a video and written testimonies.
I led off by reviewing how the Fed’s move toward unconventional monetary policy can be traced back to the “too low for too long” period of 2003-2005, and much research shows that the results were not good. (References to research are in my testimony.) Along with a breakdown in the regulatory process, these policies were a cause of the financial crisis and the Great Recession. While the Fed did a good job during the panic in 2008 as lender of last resort, it then moved sharply in an unconventional direction starting in 2009 with large scale asset purchases, erratic forward guidance, and near zero interest rates long after the recession was over. Again the results were not good.  My research and that of others shows that these policies were not effective, and may have been counterproductive.
The policy implication of this experience is clear.

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A New Opportunity for Monetary Reform

November 26, 2016

The opportunity for pro-growth tax reform (lower rates with a broader base) and pro-growth regulatory reform (with rigorous cost-benefit tests) is now better than it has been in years, because of similarities between reform ideas put forth by Congress—many in bills that have passed the House—and those put forth by president-elect Trump.
Although less commented on, the opportunity for monetary reform also seems better than it has been in years. And the reason is the same. Goals such as insulating the Fed from political pressures and creating a more predictable-transparent-accountable policy appear to be common to the Congress and the incoming Administration.  To see this, take a look at the often-overlooked monetary passages on pages 44 and 45 of the House economic reform document A Better Way: The Economy. Here’s an excerpt:
“… our economy would be healthier if the Federal Reserve was more predictable in its conduct of monetary policy and more transparent about its decision-making…. Legislation sponsored by Rep. Bill Huizenga and approved by the House – the Fed Oversight Reform and Modernization Act (the FORM Act) does the following:
Protects the Fed’s independence to chart whatever monetary policy course it deems appropriate, but requires the Fed to give the American people a greater accounting of its actions.

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Central Bank Models: A Key to Future Monetary Policy

November 23, 2016

In thinking about the future of monetary policy, it’s important to consider legislative reforms and appointments, but it’s also important to consider the economic models that have come to be a key part of policy making in central banks. The Bank of Canada showed a great deal of vision last week when it invited economists and practitioners to discuss “Central Bank Models: The Next Generation.”
We can learn from history here. In my keynote address for the conference I reviewed the 80-year history of macro policy models from Jan Tinbergen’s model of 1936 to the present. I showed how policy making with models began in “path-space” (simulating paths for the policy instruments and seeing the impact on the paths for target variables), but, with a major paradigm shift 40 years ago, moved to “rule-space” (simulating rules for the instruments and seeing the impact of economic stability over time).  Central bank models followed these developments, though with a lag, to the benefit of monetary policy and economic performance.
However, there was a retrogression in parts of the central banking world in the past dozen years, and economic performance has deteriorated with a great recession and a very slow recovery. This history suggests that a pressing problem for central bank research is to get back to a “rule-space” framework.

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A World Cup in the Battle of Ideas

November 1, 2016

Markus Brunnermeier, Harold James and Jean-Pierre Landau have just published a fascinating book, The Euro and the Battle of Ideas, in which they bring together their respective skills in economic theory, economic history and economic policy to bear on one of the most important macroeconomic problems of our times—the rules versus discretion debate. Anyone who has studied this debate—and that’s just about anyone who has taken a course in economics—would benefit from reading this book.
The book focuses on the role of government in the economy and how conflicting ideas about this role affect economic policy in Europe and beyond, including at the International Monetary Fund. But most of the economic policy ideas revolve around the rules versus discretion debate, and include policy credibility, accountability, time inconsistency, policy flexibility, moral hazard, and fiscal consolidation versus stimulus.  All of these issues have been extensively researched, and views differ. Many economists (including me) are of the view that rules-based policies are more effective, while others (including Larry Summers) argue against rules.
The fascinating hypothesis—and the organizing principle—of the book is the authors’ view that ideas differ by country.

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Committing to Economic Freedom at Home and Abroad

October 31, 2016

Dartmouth’s Doug Irwin has been writing about the General Agreement on Tariffs and Trade (GATT) that was finalized seventy years ago this month. His tweets includes a link to President Harry Truman’s statement upon the announcement of the completion of the agreement. It is amazing how different attitudes about trade agreements are now compared to then, and how rapidly attitudes have changed in the ten years since Doug wrote an optimistic op-ed “GATT Turns 60.” Doug is, of course, hoping that we can learn from how people addressed these problems seventy years ago, and develop a strategy to meet our current challenges, even though the world and problems are different.
Here it is important to point out that the GATT was part of a flurry of economic institution building in the mid-1940s. In 1945 Truman signed the Bretton Woods Agreements Act, officially creating the International Monetary Fund and the World Bank. As Henry Morgenthau, the Secretary of the Treasury, said: the Bretton Woods agreements aimed to “do away with economic evils—competitive currency devaluations and destructive impediments to trade.”
In 1946 Truman signed the Employment Act. It created two more new institutions: The President’s Council of Economic Advisers (CEA) and the Congress’s Joint Economic Committee (JEC).

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Take Off the Muzzle and the Economy Will Roar

October 17, 2016

In his Saturday Wall Street Journal essay “Why the Economy Doesn’t Roar Anymore”—illustrated with a big lion with its mouth shut—Marc Levinson offers the answer that the “U.S. economy isn’t behaving badly. It is just being ordinary.”  But there is nothing ordinary (or secular) about the current stagnation of  barely 2 percent growth. The economy is not roaring because it’s muzzled by government policy, and if we take off that muzzle—like Lucy and Susan did in “The Lion, the Witch and the Wardrobe”—the economy will indeed roar.
It is of course true, as Levinson states, that “faster productivity growth” is “the key to faster economic growth.” But it’s false, as he also states,  that it has all been downhill since the “long boom after World War II” and “there is no going back.” The following chart of productivity growth drawn from my article in the American Economic Review shows why Levinson misinterprets recent history. Whether you look at 5 year averages, statistically filtered trends, or simple directional arrows, you can see huge swings in productivity growth in recent years.  These movements—the productivity slump of the 1970s, the rebound of the 1980s and 1990s, and the recent slump—are closely related to shifts in economic policy, and economic theory indicates that the relationship is causal, as I explain here and here and in blogs and opeds.

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Should the Previous Framework for Monetary Policy Be Fundamentally Reconsidered?

October 2, 2016

“Did the crisis reveal that the previous consensus framework for monetary policy was inadequate and should be fundamentally reconsidered?”  “Did economic relationships fundamentally change after the crisis and if so how?” These important questions set the theme for an excellent conference at the De Nederlandsche Bank (DNB) in Amsterdam this past week. In a talk at the conference I tried to answer the questions. Here’s a brief summary.
Eighty Years Ago
To understand the policy framework that existed before the financial crisis, it’s useful and fitting at this conference to trace the framework’s development back to its beginning exactly eighty years ago. It was in 1936 that Jan Tinbergen built “the first macroeconomic model ever.” It “was developed to answer the question of whether the government should leave the Gold standard and devaluate the Dutch guilder” as described on the DNB web site.
“Tinbergen built his model to give advice on policy,” as Geert Dhaene and Anton Barten explain in When It All Began. “Under certain assumptions about exogenous variables and alternative values for policy instrument he generated a set of time paths for the endogenous variables, one for each policy alternative. These were compared with the no change case and the best one was selected.

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The Statistical Analysis of Policy Rules

September 24, 2016

My teacher, colleague, and good friend Ted Anderson died this week at the age of 98.  Ted was my Ph.D. thesis adviser at Stanford in the early 1970s, and later a colleague when I returned to teach at Stanford in the 1980s. He was a most important influence on me and my research. He taught me an enormous amount about time series analysis, and about how to prove formal theorems in mathematics.  I am grateful to him for sharing his wisdom and for endeavoring to instill his rigorous approach to econometric research. His lectures were clear and insightful, but it was from interacting with him in his office or in the Econometrics Seminar that one really learned time series analysis.
The Stanford Econometrics Seminar in the early 1970s was an amazingly fertile place for developing new ideas.  Fortunately for me, the seminar focused on several new books which explored formally the problem of optimal economic policy formulation in statistical or probabilistic settings.  We read and each presented chapters from Peter Whittle’s Prediction and Regulation, Masanao Aoki’s Optimization of Stochastic Systems, and Box and Jenkins’ Time Series Analysis: Forecasting and Control. It was a terrific way to learn about the latest opportunities for pushing research frontiers.  We each presented and critiqued chapters from these books and freely discussed possible extensions and implications.

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Central Banks Going Beyond Their Range

September 20, 2016

Economist John Eatwell of Cambridge and I published a joint letter in the Financial Times today. We argue that monetary policy is off track and that other policies are sorely needed. I said the same in a CNBC interview from Miami this morning. To be sure, the headline that the FT editors chose for our letter “Monetarist tools have failed to lift economies” should not be taken to mean that rules-based monetary policies of the kind that monetarists like Milton Friedman advocated have failed. Recent policies have been anything but rules-based. Here’s the letter.
Sir, You report that Mark Carney, governor of the Bank of England, told MPs that the BoE is prepared to cut interest rates further from their historic low of 0.25 per cent (“Carney leaves open chance of more UK rate cuts”, September 8).
This is unfortunate. In the face of overwhelming evidence that the exclusive reliance on monetary policy, both orthodox and unorthodox, has not only failed to secure a significant recovery of economic activity in the US, the UK or the eurozone, but is producing major distortions in financial markets, Mr Carney is promising yet more of the same.
The distortions created by policy include excessive asset price inflation, severe pressures on pension funds and a weakened banking system. The fundamental error derives from the exclusive role given to monetary policy.

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Kocherlakota on the Fed and the Taylor Rule

September 17, 2016

The use of policy rules to analyze monetary policy has been a growing area of research for several decades, and the pace has picked up recently. Last month Janet Yellen presented a policy framework for the future centered around a Taylor rule, noting that the Fed has deviated from such a rule in recent years.  A week later, her FOMC colleague, Jeff Lacker, also showed that the Fed has deviated from a Taylor rule benchmark, adding that now is the time to get back.  Last week, the Mercatus Center and the Cato Institute hosted a conference with the theme that deviations from policy rules—including the Taylor rule discussed in my lunch talk—have caused serious problems in recent years.  And this week former FOMC member Narayana Kocherlakota argued that the problem with monetary policy in recent years has not been that it has deviated from a Taylor rule but that it has been too close to a Taylor rule! Debating monetary issues within a policy rule framework is helpful, but Kocherlakota’s amazingly contrarian paper is wrong in a number of ways
First, the paper ignores many of the advantages of policy rules discovered over the years, and focuses only on time inconsistency and inflation bias. I listed the many other advantages in my comment on the first version of Kocherlakota’s paper with the same title: “Rules Versus Discretion: A Reconsideration.

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Novel Research on Elections, Policymaking, Economic Uncertainty

September 14, 2016

The Becker Friedman Institute of the University of Chicago and the Hoover Institution of Stanford University teamed up yesterday to put on a Conference on Elections, Policymaking, and Economic Uncertainty. The conference was held at the Hoover Institution Offices in Washington D.C. Steve Davis, Lars Hansen and I organized it. The aim was to combine path-breaking research with in-depth discussions of policy, including a panel with Alan Greenspan, Chris DeMuth and Steve Davis which I moderated.
This is an interesting, quick-moving field with many new analytical techniques and “big data” developments. The complete conference agenda with links to the papers and commentary can be found on this web site, but here’s a summary of the findings and policy implications:
Mike Bordo started off by showing that there is a large and statistically significant negative impact of economic policy uncertainty—as measured by the Bloom-Baker-Davis EPU index—on the growth of bank credit in the United States.  His research (joint with John Duca and Christoffer Koch) explains much of the slow credit growth in recent years when policy uncertainty has been elevated.  The lead discussant, Charlie Calomiris, provided a simple model of bank lending to explain and interpret the empirical findings.

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Think Again and Again About the Natural Rate of Interest

September 12, 2016

In a recent Wall Street Journal piece, “Think You Know the Natural Rate of Interest? Think Again,” James Mackintosh warns about the high level of uncertainty in recent estimates of the equilibrium interest rate—commonly called r* or the natural rate—that are being factored into monetary policy decisions by the Fed.  See discussion by Fed Chair Janet Yellen for example.  Mackintosh’s argument is simple. He takes the confidence intervals (uncertainty ranges) from the recent study by Kathryn Holston, Thomas Laubach, and John Williams, which, as in an earlier paper by Laubach and Williams, finds that the estimate of the equilibrium rate has declined. Here is a chart from his article showing the wide range of uncertainty.

Mackintosh observes that the confidence intervals are very wide, “big enough to drive a truckload of economists through,” and then concludes that they are so large that “it’s entirely plausible that the natural rate of interest hasn’t moved at all.”
This uncertainty should give policy makers pause before they jump on the low r* bandwagon, but there is even more reason to think again: the uncertainty of the r* estimates is actually larger than reported in the Mackintosh article because it does not incorporate uncertainty about the models used.

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Jackson Hole XXXV

August 31, 2016

Everyone keeps asking about this year’s Jackson Hole monetary conference and how it compared with the first. Well, I wrote about the first on my way to this conference, and I have to say the thirty fifth lived up to its billing as “monetary policy frameworks for the future.” One speaker after another proposed new frameworks—some weird, some not so weird—while discussants critiqued and central bankers and economists debated from the floor, and later on the hiking trails. Steve Liesman’s scary but unsurprising CNBC pre-conference survey demonstrated the timeliness of the topic: 60% of Fed watchers don’t think the Fed even has a policy framework.
Fed Chair Janet Yellen led off. Most of the media commentary—including TV interviews—focused on whether or not she signaled an increased probability of an interest rate rise. But mostly she talked about the theme of the conference: a monetary policy framework for the future. The framework that she put forward centered on a policy rule for the interest rate—a Taylor rule with an equilibrium rate of 3 percent—and in this sense the framework is rules-based with well-known advantages over discretion. Research at the Fed indicates that the rule would work pretty well without an inflation target higher than 2% or a mechanism for negative interest rates.

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A Less Weird Time at Jackson Hole?

August 25, 2016

I’m on my way to join the world’s central bankers at Jackson Hole for the 35th annual monetary-policy conference in the Grand Teton Mountains. I attended the first monetary-policy conference there in 1982, and I may be the only person to attend both the 1st and the 35th.  I know the Tetons will still be there, but virtually everything else will be different. As the Wall Street Journal front page headline screamed out on Monday, central bank Stimulus Efforts Get Weirder. I’m looking forward to it.
Paul Volcker chaired the Fed in 1982. He went to Jackson Hole, but he was not on the program to give the opening address, and no one was speculating on what he might say. No other Fed governors were there, nor governors of any other central bank. In contrast, this year many central bankers will be there, including from emerging markets. Only four reporters came in 1982 — William Eaton (LA Times), Jonathan Fuerbringer (New York Times), Ken Bacon (Wall Street Journal) and John Berry (Washington Post). This year there will be scores. And there were no television people to interview central bankers in 1982 (with the awesome Grand Teton as backdrop).
It was clear to everyone in 1982 that Volcker had a policy strategy in place, so he didn’t need to use Jackson Hole to announce new interventions or tools.

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CBO’s New Way to Evaluate Fiscal Consolidation Plans

August 24, 2016

In its recently released budget outlook, the Congressional Budget Office projects that this year’s federal deficit will increase by 35% from last year to $590 billion, and that the debt will rise from $14 trillion to $23 trillion by 2026, or from 77% to 86% of GDP. Clearly it’s time for a fiscal consolidation plan.
Yet we’re not hearing about any such a plan on the campaign trail. If anything candidates are proposing more, not less, federal government spending because many people think reducing the deficit is bad for the economy, even though modern economic models show this need not be the case. It would help the political debate if CBO would employ such state-of-the-art models, as I recommended here based on research with John Cogan, Volker Wieland and Maik Wolter.
Actually the CBO might be getting closer to such a recommendation. This year the CBO estimated the impact of a fiscal consolidation plan proposed by the House Budget Committee. The plan, which was used in developing a budget resolution, would reduce the deficit mainly by reducing non-interest spending as a share of GDP compared to the baseline (from 22% to 17% by the year 2040), while increasing revenues as a share of GDP by a much smaller amount (.2%).

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The Staying Power of Staggered Wage & Price Setting in Macro

August 19, 2016

The new Handbook of Macroeconomics is now in production as all 34 chapters have been submitted (by 74 different authors).  It will be out later this year. Harald Uhlig and I edited the book, and we each contributed a chapter. My chapter (a draft appears as an NBER Working Paper) is on the staggered price and wage setting model.
The staggered wage and price setting model has had remarkable staying power.  Originating in the 1970s before the advent of real business cycle models, it has been the theory of choice in generation after generation of monetary business cycle models used for policy analysis as Volker Wieland, Elena Afanasyeva, Meguy Kuete, and Jinhyuk Yoo show in their review of over sixty macroeconomic models in their chapter for the Handbook.
But in recent years “Big Data” style research projects have radically expanded knowledge of the microeconomics of wage and price setting behavior from a few salient facts about magazine prices or personal salary experiences into complex data sets with millions of observations. These data sets provide new evidence to test and discriminate between different types of models.
There is new evidence that prices are set at a fixed level for six months or more, especially if sales and reference prices are accounted for properly.

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Desperately Needed:  Reforms to Raise Productivity Growth

August 11, 2016

The data released this week on labor productivity growth are really terrible. The growth rate has been negative now for three quarters in a row, and it was – .4 percent over the past year. Unfortunately, these data are reinforcing a pronounced negative trend in recent years which implies declining income growth and lower standards of living.
Sadly, there is little public discussion of what to do about it.  Many say that policy reforms—whether tax reform, regulatory reform, budget reform, or monetary reform—will not work because the stagnation is “secular,” and we are in a new era of permanently lower growth. Others say that productivity data are not reliable and should not influence public policy.  Still others say that supply-side reforms will not work because we have a demand-side problem; rather we need another short-term economic stimulus.
The chart suggests otherwise. It shows productivity growth since the 1960s smoothed in two different ways—a five-year moving average and a Hodrick-Prescott trend. Both show major swings in productivity over this period. I have highlighted the swings with the green arrows.

Clearly there is nothing permanent or secular here.  Productivity growth fell in the 1970s and then picked up in the 1980s and 1990s.

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Economic Exasperation Continues

July 29, 2016

With today’s disappointing GDP release for the second quarter and downward revisions for the previous two quarters, the U.S. economy completes 7 years of economic expansion with a whimper. And with an average annual growth rate of only 2.1 percent over the 28 quarters from 2009Q3 to 2016Q2, the economic expansion is more aptly called economic exasperation.  I have been pointing to poor government economic policy as the main reason for this poor performance from the start, explaining the defects with each alternative explanation as it has arisen over time, including “it’s not so weak” and then “weak recoveries just happen after deep recessions” and then “it’s just secular stagnation.”  People’s exasperation about the economy and Washington policy is seen in this presidential election season.  The slow economic recovery is a tragedy for many people, especially when you combine it with the great recession that went before it. Policy must change. You would think that reports of three more quarters of disappointing growth would spur people into action.
Here is an update of a graph I have been using to compare the exasperation period with the much stronger expansion period of the 1980s:

and an updated list of links to posts on this subject on which also include pro-growth policy reforms.

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An Economic and Security Policy Blueprint for America

July 12, 2016

A timely new policy book, Blueprint for America, edited by George P. Shultz, is being released today online for the first time. The release coincides with the start of platform writing by Republicans this week and Democrats the following week, and then by national political conventions and the general Presidential campaign.  But the book is purposely meant to be non-partisan as ten contributors with experience in economics, national security, finance, health care, energy, and education join Shultz in laying out novel and practical reforms for governing as well as for campaigning during the election.
In my view, the book is worth a serious look because it endeavors to bring a greater focus to economic and security policies than we have seen in the campaign. It candidly describes and diagnoses the serious economic and security problems America now faces, and it offers solutions to those problems.  Importantly it combines practical ideas on economics and national security, stressing the importance of getting back to long-term strategic thinking with the goal of improving people’s lives.
The book consists of 12 chapters (all online here)
The Domestic Landscape by Michael J. Boskin
Entitlements and the Budget by John F. Cogan
A Blueprint for Tax Reform by Michael J. Boskin
Transformational Health Care Reform by Scott W. Atlas
Reforming Regulation by Michael J.

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