Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe. Wasn't Joe? You know
Speaker 1: what question we keep asking lately, especially probably something about
Speaker 1: you know, monetary policy and fiscal policy of the zero
Speaker 1: lower bound, whether it all works anymore, and whether we
Speaker 1: have to rethink literally everything every would have thought for decades. Yeah,
Speaker 1: I think that's right, But I was thinking more specifically,
Speaker 1: we keep asking policymakers if they actually understand inflation, and
Speaker 1: I think that's something we asked Neil Kashkari very recently,
Speaker 1: and we asked a Vito our Constantio before that. And
Speaker 1: I'm not entirely convinced that we do understand inflation, Like clearly,
Speaker 1: the fact that we've been missing the target for many,
Speaker 1: many years suggests that there is something that we are missing.
Speaker 1: I mean, it really is one of the sort of
Speaker 1: most profound questions. Um, And it was we chatted several
Speaker 1: weeks ago with the ECB vice president, a former e
Speaker 1: c V vice president, Vitor Constantio, and you know, it's like,
Speaker 1: here's someone high up in a central bank. The central
Speaker 1: bank's mandate is to either target or control inflation and
Speaker 1: yet there's a lot of doubt whether anyone actually has
Speaker 1: a sort of robust theory of what causes it. And
Speaker 1: it's like a pretty pretty profound thing given how much,
Speaker 1: given how much is weighing on this uh, this measure
Speaker 1: or this constant? Yeah, absolutely, And I gotta say, the
Speaker 1: way policymakers think about inflation, there are a couple things
Speaker 1: or factors that come up a lot in their intellectual
Speaker 1: framework for thinking about this. And that is or are
Speaker 1: that is our that is our it's our star. Sorry
Speaker 1: I'm not making any sense, but those things are known
Speaker 1: as the stars. Do you do you know what I mean, Joe,
Speaker 1: I do? But why do you like describe them? Because
Speaker 1: I bet you'll like describe the stars better? This this
Speaker 1: idea that central bankers, policymakers have, this idea of stars.
Speaker 1: I'm kind of I I get it, But why do
Speaker 1: you like sort of tell people what they are? Let
Speaker 1: me just say first of all that probably the best
Speaker 1: known star is our star, or the neutral rate of interest,
Speaker 1: which is the place where monetary policy isn't easy or tight,
Speaker 1: it's just neutral. So the clue is in the name.
Speaker 1: But the stars in general are kind of they kind
Speaker 1: of describe the longer term, steady state of the economy.
Speaker 1: So there are things like the natural rate of unemployment, uh,
Speaker 1: the neutral rate of interest, which I mentioned, the level
Speaker 1: of potential output, the growth rate of potential output, as
Speaker 1: well as the central banks inflation target. And they're called
Speaker 1: stars because all of the variables are shown as a
Speaker 1: lowercase letter and a little star next to it. So
Speaker 1: our star, y star, g Star, things like that, and
Speaker 1: they've sort of come into prominence in recent years. So
Speaker 1: Jerome Pale at his first speech at Jackson Hole when
Speaker 1: he became FED chairman, gave the whole talk that was
Speaker 1: basically just about the our star. And I think the
Speaker 1: best way to think about them is probably that the
Speaker 1: stars are pieces of the missing inflation puzzle that we've
Speaker 1: been talking about. So if inflation isn't showing up like
Speaker 1: central banks think that it should, then it's possible that
Speaker 1: there's more slack in the economy than appreciated, or it's
Speaker 1: possible that monetary policy isn't actually as accommodative as central
Speaker 1: banks I think it is. And that's where the stars
Speaker 1: come in. Like our our assumptions of the stars of
Speaker 1: the natural state of the economy, the long term natural
Speaker 1: state of the economy. Are those correct? Right? I mean that,
Speaker 1: by the way, people should really go read that Jackson
Speaker 1: Hole speech from Paul from because I think it was
Speaker 1: very great. It was really good. It's sort of anticipated
Speaker 1: a lot of the discussions that have ensued since then. Um,
Speaker 1: this idea that tightness or heat in the markets doesn't
Speaker 1: necessarily show up an inflation like it once did, but
Speaker 1: showed up more in financial markets financial instability. And then
Speaker 1: But I think this whole concept of stars, um, you know,
Speaker 1: there's sort of two big questions in my mind when
Speaker 1: we when people talk about them. Is one is how
Speaker 1: do we know what they are with any sort of
Speaker 1: useful precision? Like no one knows exactly what the perfect
Speaker 1: rate of interest is at any given moment, but can
Speaker 1: we get close enough at any given moment for the
Speaker 1: to be useful guide? And two, are these useful concepts
Speaker 1: at all? I mean, they're inherently sort of unknowable, They're
Speaker 1: inherently sort of abstract. But is are the stars a
Speaker 1: useful um, you know, guide for policy period or should
Speaker 1: we even be thinking in terms of stars? Both of
Speaker 1: those questions I think have a lot of relevancy and
Speaker 1: urgency these days. Absolutely, UM agree with you on both
Speaker 1: those points. So today I'm really excited to say we
Speaker 1: are going to dig into the stars in detail, and
Speaker 1: we have someone who's sort of adopted Jerome Pale's Jackson
Speaker 1: Hole speech as the jumping off point for a really
Speaker 1: in depth examination and estimation of the stars. We're going
Speaker 1: to be talking to Peter Williams. He's a research analyst
Speaker 1: over at the International Monetary Fund, and he wrote a
Speaker 1: paper this summer called Reading the Stars, so you know,
Speaker 1: a good title for decoding all these different stars and
Speaker 1: natural rates and things like that. Peter, thank you so
Speaker 1: much for coming on all thoughts, I thank you so
Speaker 1: much for having me. Really appreciate the opportunity to be
Speaker 1: on the podcast. And I guess I just want to
Speaker 1: sort of start off by saying that all the views
Speaker 1: I articulate today are solely my own, UM, not the
Speaker 1: I m f S executive board, its management, UM, or
Speaker 1: the institution as a whole. They're just my personal views. Okay,
Speaker 1: you've done the disclaimer, so excellent. We can dive into
Speaker 1: the paper. UM. So, I guess my first question is
Speaker 1: Joe sort of hinted at this in the intro. But
Speaker 1: how do you even go about estimating things like the stars,
Speaker 1: because to me, they just seem they seem like such
Speaker 1: big and vast variables that can change quite easily. I
Speaker 1: don't even know how you begin to to try to
Speaker 1: guess what they actually are. So can you give us
Speaker 1: a description of how people traditionally go about it? Yeah, So,
Speaker 1: a lot of the more kind of traditional method especially
Speaker 1: sort of before the crisis, you know, they usually had
Speaker 1: what we're kind of i would say, fairly simple models.
Speaker 1: Oftentimes they just kind of looked like the is uh
Speaker 1: you call them just moving averages of the data. So
Speaker 1: you know, your your estimate of the long run rate
Speaker 1: of unemployment might just kind of look like a slowly
Speaker 1: moving trend that kind of fluctuates up a little bit
Speaker 1: in bad times and goes down a little bit in
Speaker 1: good times. But to a large extent, you know, the
Speaker 1: problem of economics, especially in the seventies and eighties, was
Speaker 1: one of inflation um so autumn sort of really nitty gritty,
Speaker 1: kind of like details about you know, what's the perfect
Speaker 1: rate of unemployment where it's the perfect of growth. We're
Speaker 1: kind of just subsumed by trying to get inflation down
Speaker 1: to a much more lower and stable level. And like
Speaker 1: when you have interest rates at ten percent or twelve percent,
Speaker 1: inflations at eight or nine, you know, some of the
Speaker 1: little tiny variations don't matter as much on the real
Speaker 1: side because you have you have sort of a bigger
Speaker 1: problem from a monetary policy perspective in inflation. There's some
Speaker 1: interesting debates that we've been discussing them a lot on
Speaker 1: the podcast um about whether these are useful concepts period
Speaker 1: at all. But before we get into any of these
Speaker 1: questions or really dive into some of the more technical
Speaker 1: questions about estimating them in real time, what's the history
Speaker 1: of the stars? Like where did this idea that there
Speaker 1: is some natural rate of interest out there or natural
Speaker 1: rate of inflation or anything like that out there that
Speaker 1: is worth pursuing, is worth understanding. Where where did that
Speaker 1: come from? So I mean that the sort of like
Speaker 1: first real usage of like especially our star is kind
Speaker 1: of the one of the longest history, and that goes
Speaker 1: back to like Nutwick Cell, who's really a name I've
Speaker 1: only ever read in textbooks referencing him as kind of
Speaker 1: the first creator of the idea of the neutral rate
Speaker 1: of interest. So that you know, very long ago in
Speaker 1: sort of economic history, and it's sort of you know,
Speaker 1: then the original idea of the stars, especially our star,
Speaker 1: the most prominent one, which is this is the rate
Speaker 1: of interest, which if over a long horizon, kind of acciliorates.
Speaker 1: You know, at first it was like a coilibrate savings
Speaker 1: and investment, but you know, companies and people invest in
Speaker 1: save at different interest rates in the policy rates. You know,
Speaker 1: over time it kind of became more and more policy
Speaker 1: focused and sort of less this kind of generic whole
Speaker 1: economy interest rate, and that you know that evolution has
Speaker 1: been happening. You could really stay starting in the fifties
Speaker 1: with as economics became a bit more quantitative, and then
Speaker 1: it's kind of continued ever since, where like the models
Speaker 1: have become more in depth and rigorous, they've added more variables,
Speaker 1: more data. But also at the same time, you know,
Speaker 1: there's sort of like underlying issues about like do these
Speaker 1: things really exist, how precisely measured are they? Are we
Speaker 1: dealing with data that has lots of regime shifts. Those
Speaker 1: problems don't go away in economics, that doesn't make sort
Speaker 1: of you know, any policymaker I understand sometimes the frustration
Speaker 1: you might feel as the policy make like where should
Speaker 1: we be going and the answers we think, right now
Speaker 1: the answer is here, but the world may change, we
Speaker 1: may have different problems in five years. You know. It's
Speaker 1: it's never a very simple solution as to where we
Speaker 1: should go. So speaking of that evolution, I mean you
Speaker 1: mentioned in your paper that part of the inspiration for
Speaker 1: it was Pal's Jackson whole speech um mostly about our
Speaker 1: star back in why why do you think our star
Speaker 1: has sort of like experience this new popularity or why
Speaker 1: do you think it's become of interest to policymakers especially
Speaker 1: at the fun Well, I wouldn't say it wasn't of
Speaker 1: interest kind of before the crisis, but right, I mean
Speaker 1: more interest relatively. Right, it wasn't of interest because the
Speaker 1: concept wasn't particularly interesting because if you look at you know,
Speaker 1: estimates from call it the beginning of the financial crisis,
Speaker 1: they data doesn't really move a whole lot. The estimate
Speaker 1: you know of our Star might go from like two
Speaker 1: and a half to three and then goes back down.
Speaker 1: It goes back up a little bit, but it's you know,
Speaker 1: in a lot of ways, like the Great Moderation really
Speaker 1: is a true kind of feature of the data, like
Speaker 1: everything is pretty nice and stable. That's sort of like
Speaker 1: this kind of top of economy, very macro view from
Speaker 1: you know, kind of when inflation falls early until the
Speaker 1: financial crisis. Obviously there's lots of interesting things happening inside
Speaker 1: the economy and these sectoral changes, but we just look
Speaker 1: at the top down. It's like, okay, you know, our
Speaker 1: stars kind of just jugging on because there wasn't a
Speaker 1: whole lot to talk about, and this sort of classic
Speaker 1: assumption that our stars just two which John Taylor put
Speaker 1: in his kind of Taylor rule in very famous paper
Speaker 1: that sort of guides all large chunk of monetary policy research,
Speaker 1: since he just kind of says to you know, he
Speaker 1: like has an intuition about it, but it's basically he
Speaker 1: just kind of says two percent because it feels right,
Speaker 1: and that sort of is the anchor for most everybody's
Speaker 1: estimates until really for most forecasters and policymakers estimates until
Speaker 1: about twelve or is when you see this big evol
Speaker 1: we should have while we really need to be think
Speaker 1: where we are. This isn't just like a simple shock
Speaker 1: from the financial crisis, like all of the data seems
Speaker 1: to have changed. All these stars seem to have changed.
Speaker 1: You know, the world is really this wasn't just a
Speaker 1: simple business cycle that hit us, but something a bit
Speaker 1: more kind of long lasting and structural. So basically, we
Speaker 1: had these relationships in the economy that seemed fairly stable,
Speaker 1: relationships between unemployment and inflation. We had monetary policy that
Speaker 1: seemed to do the job is expected, where the Fed
Speaker 1: might lower rates and then generates some activity and maybe
Speaker 1: some inflation than high grades and then uh, you know,
Speaker 1: slow the economy and maybe slow inflation. And essentially it's
Speaker 1: the post crisis period in which these relationships seemed to
Speaker 1: break down, in which unemployment plunging didn't seem to induce
Speaker 1: arise and inflation and extremely law accommodative monetary policy by
Speaker 1: historical standards didn't seem to do much easier. That is,
Speaker 1: essentially reignited this debate about where and what the where
Speaker 1: and what our starts. Yeah, I'd say that seems right.
Speaker 1: I think. You know, initially, right after the crisis, you
Speaker 1: look at sort of like private sector forecasts, sort of
Speaker 1: the f O m c s like Teal book forecast
Speaker 1: from the staff. You know, you sort of see that
Speaker 1: everybody kind of thinks, you know, after three or four years,
Speaker 1: we'll kind of be back to normal. Um. Obviously, we
Speaker 1: don't get back to normal sort of in our in
Speaker 1: our papers view until maybe teen or nineteen. You know,
Speaker 1: it's a very long and drawn out recovery, um. And
Speaker 1: not just on sort of the growth side, which I
Speaker 1: think is easier for people to kind of think about,
Speaker 1: but also you know, the unemployment rate you know, was
Speaker 1: quite high after the crisis, but it also falls you know,
Speaker 1: quite slowly, and so we have you know, this situation
Speaker 1: says okay that you know, why is the unemployment rate
Speaker 1: falling so slowly? Why is growth not rebounding and the
Speaker 1: way we thought it might, and you know there are
Speaker 1: other compounding, confounding factors. Is you know, I think every
Speaker 1: economist is sort of continuously reminded when trying to actually
Speaker 1: do work with data. You know, it's easy to make
Speaker 1: models that sort of describe the mechanics pretty simply, but
Speaker 1: the frustrating realities that you know we have. You know,
Speaker 1: in a model like this, we sort of have the
Speaker 1: neutral rate and sort of the policy rate are the
Speaker 1: kind of these two variables that say, okay, whatever the
Speaker 1: gap between these is we call like the stance of
Speaker 1: monetary policy that will sort of accelerate growth or it
Speaker 1: will decelerate growth. But you know, in reality, you've got
Speaker 1: fiscal policy, you've got overseas developments, you have financial condition shocks,
Speaker 1: you have all these other other confounding variables that make
Speaker 1: it pretty hard to get a read through into exactly
Speaker 1: what the stance of policy really is once we kind
Speaker 1: of control for all these other things that I mean, frankly,
Speaker 1: you know, if we had a perfect world, then we
Speaker 1: can model everything just the way we wanted it to.
Speaker 1: We could take that into account. But you know, sadly,
Speaker 1: economic data is not usually particularly informative and the way
Speaker 1: we would like it to be, and it's everything moves
Speaker 1: in the same you know, everything is always shifting. All
Speaker 1: the data is moving around, usually in very correlated ways.
Speaker 1: So it's, uh, you know, it's a challenging set of
Speaker 1: statistical problems in addition to being a challenging kind of
Speaker 1: definitional and conceptual issue as well. Could you talk a
Speaker 1: little bit more about your model then, and how you
Speaker 1: sort of um accounted for those difficulties and what your
Speaker 1: model does differently to traditional estimates of the Stars. I
Speaker 1: read Chair Powell's Jackson Jackson Whole Speed a whole bunch
Speaker 1: of times right when it came out and was just
Speaker 1: kind of steering up. It's like, well, we've been having
Speaker 1: these exact same debates. He outlines, Um, you know, growth
Speaker 1: has been well, the unemployment rate is now by that point,
Speaker 1: gotten to be very low levels, but inflation doesn't always
Speaker 1: seem to be there a whole lot, and we're just
Speaker 1: trying to think, okay, what is you know, we conceptually
Speaker 1: as institutions, we kind of want to have these guides,
Speaker 1: these sort of guiding variables. They help us. They help
Speaker 1: us in forecasting, they help us understand the economy right now,
Speaker 1: you know, they help us think about sort of longer
Speaker 1: run structural and framework issues. So you could have you
Speaker 1: kind of need them as sort of organizing thoughts and
Speaker 1: principles as an economist, at least in sort of like
Speaker 1: classical like classic sort of policy making institution style ECONO.
Speaker 1: If your heterodox, you can kind of dispense with them
Speaker 1: and maybe things become a bit simple in some ways.
Speaker 1: But you know, inside inside the big institutions, you like them.
Speaker 1: And so what we decided to do sort of taking share.
Speaker 1: Powell's prompt was, what's first of all, we know that
Speaker 1: sort of of the stars, we know that one of
Speaker 1: them is kind of fixed. The FED has told us
Speaker 1: we want inflation to over the long run be two percent,
Speaker 1: and they've they've tweaked definition recently, you know, going from
Speaker 1: sort of symmetric to two with instead now they're as
Speaker 1: sort of an average two percent. But you know, I
Speaker 1: don't think that makes a particularly large difference in terms
Speaker 1: of the model perspective. You know, it may lead to
Speaker 1: changes in policy going forward, but you know from a
Speaker 1: modeling perspective, you can handle them pretty similarly. So, you know,
Speaker 1: pie star, the long run inflation target is two percent,
Speaker 1: and so you can sort of treat that as an
Speaker 1: organizing principle around the rest of the rest of the economy.
Speaker 1: And you say, when inflation is at two percent, we
Speaker 1: would expect everything else to be at equilibrium. So we
Speaker 1: can sort of fix all these other kind of equilibrium
Speaker 1: conditions we call them an economics around that kind of
Speaker 1: primary identity. And then you sort of add in some ways,
Speaker 1: like okay, what are the other things that drive inflation?
Speaker 1: Because if we describe inflation, well, now having sort of
Speaker 1: fixed this relationship between sort of two percent equilibrium. If
Speaker 1: we describe inflation, well, maybe then we can describe the
Speaker 1: rest of the economy a bit better and more realistically
Speaker 1: as well. So you started, you know, we added in, um,
Speaker 1: it's just you ve Torta about this in his podcast
Speaker 1: as well. You know, it's originally the Phillips curve. The
Speaker 1: relationship between it's called the output gap for the unemployment
Speaker 1: rate and inflation was like, you know, it was very obvious.
Speaker 1: Sadly it's not so obvious anymore, making you know, economist
Speaker 1: life much more difficult, but also allowing us to write
Speaker 1: papers about it. So I suppose there's a certain personal park,
Speaker 1: and so we sort of add in you know, oil prices,
Speaker 1: we add in some other we call them supply shocks,
Speaker 1: and economics we can think of it us like these
Speaker 1: things that affect inflation and kind of the short run,
Speaker 1: but we don't necessarily expect they'll have very long run
Speaker 1: effects on the rest of the economy. So like short
Speaker 1: term changes in productivity growth also tend to affect inflation
Speaker 1: a little bit. Oil prices, import prices, these sorts of
Speaker 1: things that we say, we've described inflation pretty well now
Speaker 1: le's look about the rest of the economy, and so
Speaker 1: to sort of pin down sort of the real side
Speaker 1: of the economy, you can start adding in other variables
Speaker 1: sort of anchor everything else. So you know, we have
Speaker 1: GDP very common um and they also sort of use
Speaker 1: gross domestic income, which is conceptually very similar to GDP,
Speaker 1: just measures on the income side of the production side.
Speaker 1: And you can add in labor market variables. The most
Speaker 1: important one is obviously kind of the headline unemployment rate,
Speaker 1: but you can add in others because the relationships tend
Speaker 1: to be pretty similar. But you know, sometimes to get
Speaker 1: just a bit more confidence and estimates by adding in
Speaker 1: more data, the trade off is that you added you
Speaker 1: make the model more complicated. So it's a it's a
Speaker 1: difficult balancing act trying to create a paper like this
Speaker 1: that a model like this that sort of goes through
Speaker 1: you have enough data to describe everything precisely, but not
Speaker 1: such a big model that you're suffering from sort of
Speaker 1: classic overfitting problems. It's you know, if if we can
Speaker 1: get another twenty years of data without any structural changes
Speaker 1: in the economy, that would be great, and my model
Speaker 1: would be estimated a bit more precisely, but I don't
Speaker 1: think that's going to happen. Just knowing the way of
Speaker 1: the last twenty years have gone, it seems unlikely that
Speaker 1: you'll get this nice kind of perfect um economistrician's dream scenario.
Speaker 1: You know, you described this process of unemployment, maybe some productivity.
Speaker 1: Heterodox eco types should say, Look, this whole thing is
Speaker 1: like nonsense. There is no such thing is our star.
Speaker 1: There's not going to be some rate of interest that
Speaker 1: sort of magically brings the economy into balance. And you know,
Speaker 1: the pursuit of it is a waste of time. And
Speaker 1: of course you could have a lot of fantasy equations
Speaker 1: with Greek letters that somehow make it look like you've
Speaker 1: mathematically derived this thing. But you know, it's all as
Speaker 1: you say, and you as you acknowledge. You know, if
Speaker 1: you do too much, you're you risk overfitting it and
Speaker 1: not actually getting any data. Just step back and sort of,
Speaker 1: in your view, defend the premise of this search for
Speaker 1: a sort of mythical number that if we were to
Speaker 1: find it, and if we were to know it, and
Speaker 1: if we were to have the formula, would roughly bring
Speaker 1: the economy into balance. Actually, yeah, that's quite a tough one. Sorry.
Speaker 1: You know, I understand someworm of the heterodox perspective because
Speaker 1: it does seem like sort of classical econ and struggled
Speaker 1: a lot and last, especially since the crisis. But I
Speaker 1: think a lot of it is that some except both
Speaker 1: as a policymakers, you know, you want to have a
Speaker 1: sense of how much you're actually affecting the economy at
Speaker 1: any given point, Right, So this notion of like where
Speaker 1: the neutral rate is, so I could get a good
Speaker 1: analogy might be sort of driving if you can't see
Speaker 1: the ppidometer in your car, you have some other indicators,
Speaker 1: but you don't really know how fast you're going and
Speaker 1: if you're actually appropriate for the space around you. So
Speaker 1: sort of we can think about the neutral rate and
Speaker 1: these stars. It's sort of helping give us a bit
Speaker 1: more context for where we are relative to where we
Speaker 1: you know, kind of should be based on the rest
Speaker 1: of the economy. Where are our make belief spidometer list car,
Speaker 1: and so it helps us make sure we're going at
Speaker 1: the appropriate level and we're not overstimulating the economy, because
Speaker 1: the problem is that if you over stimulate the economy
Speaker 1: and you give it, you know, way too much support
Speaker 1: not been a problem since we hit the zero over bound,
Speaker 1: but historically, you know, eventually you would get in a
Speaker 1: situation where you've overheated the economy. Things are sort of
Speaker 1: booming too much and you've kind of created this investment
Speaker 1: boom or whatever boom, and then you know, booms pop
Speaker 1: and recessions are you know, to be avoided. And you know,
Speaker 1: I think everyone in economics would say it's easier to
Speaker 1: sort of be a bit more forward looking and kind
Speaker 1: of think about where you are and you can go
Speaker 1: from there and to create more of an optimal path,
Speaker 1: whereas if you try and just always be reactive and
Speaker 1: backward looking, you know, it's much harder to kind of
Speaker 1: really get a sense and sort of avoid some of
Speaker 1: these predictable issues. And I think it's interesting example actually
Speaker 1: is that you know, not exactly the neutral rate, but
Speaker 1: the FED is sort of applied these same sort of
Speaker 1: principles in other ways. Obviously they still get to the
Speaker 1: neutral rate for the sort of setting the FED funds rate,
Speaker 1: but on regulatory policy you see sort of similar things.
Speaker 1: You know, they the stress testing exercises are actually I
Speaker 1: think they're not applying the neutral rate concept, but it's
Speaker 1: sort of the same way we want to have safety
Speaker 1: guide posts sort of around the economy. We're not just
Speaker 1: sort of, you know, we sort of moved on and
Speaker 1: changed a bit sort of the underlying paradigms. On the
Speaker 1: regulatory side, I think that actually helps compensate for some
Speaker 1: of perhaps the weaknesses of the neutral rate, just because
Speaker 1: the neutral rate is so low now that it's hard
Speaker 1: for you know, regulatory policy to maybe support as much.
Speaker 1: But then you can say, if we keep the financial
Speaker 1: system pretty safe, one positive of that is and it
Speaker 1: makes recessions probably less likely and less likely to be
Speaker 1: particularly bad. So you can sort of use other policy
Speaker 1: tools to kind of help make up for this kind
Speaker 1: of lack of policy support through the kind of the
Speaker 1: classic interest rate channel. They might phrase it a bit differently,
Speaker 1: but I think that you can see that in some
Speaker 1: other policy reform agendas that have kind of come along board,
Speaker 1: especially since COVID hit m HM. So I wanted to
Speaker 1: ask you a little bit more about that. So one
Speaker 1: of the things from your paper is that your estimate
Speaker 1: of our star of the neutral rate of interest is
Speaker 1: basically lower than I think almost everyone else is um
Speaker 1: in academia, were you surprised at that finding. And I guess,
Speaker 1: secondly to the financial stability point, Um, what did your
Speaker 1: paper actually tell us about the previous financial crisis and
Speaker 1: what our star looks like, you know, building up to two? Okay,
Speaker 1: so i'll think called the first one of those. So yeah,
Speaker 1: when each kind of first run the model and we
Speaker 1: see the outputs come out, I was a little surprised
Speaker 1: by the r star estimate. I'll agree with you. Um,
Speaker 1: you know, I think it's the lowest I've seen, at
Speaker 1: least for the US, you know, from I think anywhere. Um,
Speaker 1: But I think it makes sense because sort of what
Speaker 1: ends up determining our star is the output gap or
Speaker 1: like we call it, like slack the business like all
Speaker 1: the output gap. After the financial crisis, the output gap
Speaker 1: was very very negative, but also recovered very very slowly,
Speaker 1: And so because it was recovering a lot more slowly
Speaker 1: than sort of the model kind of naively would expect otherwise,
Speaker 1: it suggests the policy was a lot less supportive than
Speaker 1: it normally would have been, which you know, when you
Speaker 1: sort of work out the math, if policy is less supportive,
Speaker 1: that means your neutral rate is actually lower than you
Speaker 1: might have expected, and you know, we make some other
Speaker 1: mechanical peaks in our model that may affect our views
Speaker 1: of the neutral RTA, but a little bit like we
Speaker 1: include what's called the shadow rate, which sort of tries
Speaker 1: to incorporate the stance of monetary policy via que when
Speaker 1: you're at Fuzier lower about. So the shadow rate could
Speaker 1: affect our estimates a little bit from all these of
Speaker 1: Q programs and forward guidance. But in the end, you know,
Speaker 1: it was a very long, very difficult recovery after a
Speaker 1: very large shock, and I think it seems kind of
Speaker 1: natural to imagine that policy was less supportive than we
Speaker 1: thought at the time, you know, just because it took
Speaker 1: so much longer to get back to normal than we
Speaker 1: publish when we thought it should have taken. And so
Speaker 1: going back to the kind of the story of the
Speaker 1: crisis that flows out of that sort of you know,
Speaker 1: the way we have defined everything in our paper, you know,
Speaker 1: it's it's all about sort of the inflation target longer
Speaker 1: inflation expectations um because we sort of divorced the inflation
Speaker 1: targeting mandate from kind of the financial stability one. You know,
Speaker 1: the paper does give I think a look at the
Speaker 1: period right before the global financial crisis. That's a little
Speaker 1: different from most others. So we see, you know, right
Speaker 1: before the crisis, we actually don't think there's a positive
Speaker 1: kind of outblut gap. We think the economy was you know,
Speaker 1: pretty close to normal ish conditions. But what was happening
Speaker 1: underneath was we've had you know, okay growth in the
Speaker 1: mid two thousand's not spectacle or by the standards of
Speaker 1: the night needs, but it was okay. But what it
Speaker 1: actually happened is that sort of the stars were all
Speaker 1: kind of deteriorating about, like potential growth was falling, and
Speaker 1: so it looks like what happened prior to that, you know,
Speaker 1: in the lead up to the crisis was basically we
Speaker 1: had a lot of credit fuel growth, which is sort
Speaker 1: of supporting overall growth, but it wasn't really leading to
Speaker 1: any sort of positive benefits on the supply side of
Speaker 1: the economy. So you have what is effectively this like
Speaker 1: credit boom, which kind of deteriorates sort of long run growth,
Speaker 1: It affects the other sort of potential estimates, and then
Speaker 1: we you know, sort of the credit cycle blows up
Speaker 1: and it kind of just gotten back to an okay
Speaker 1: state of the economy, and it was interesting when we
Speaker 1: saw those estimates. In one sense, it was surprising because
Speaker 1: you think the economy was like overheating. We just had
Speaker 1: a big bubble that popped. Obviously the real stit of
Speaker 1: the economy should have been overheated too, But really it's
Speaker 1: the financial system was full of excess. But I think,
Speaker 1: you know, if you go back and sort of look
Speaker 1: at people's kind of lived experiences in the mid two thousand's,
Speaker 1: you know, the economy wasn't really that great for you know,
Speaker 1: many or most people, you know, So I think it's
Speaker 1: actually one of the interesting parts to me about this
Speaker 1: paper is that we were the anchor on the inflation target,
Speaker 1: which I think for a lot of people that that's
Speaker 1: very hawkish. I mean, you must not really care about people,
Speaker 1: you know, it's very kind of austere way of looking
Speaker 1: at the world. But the results we get by doing
Speaker 1: that are actually you know, suggestive of I think, you know,
Speaker 1: we actually made a lot of mistakes in the last
Speaker 1: twenty years, and so as a result, you know, we
Speaker 1: were kind of thinking about and seeing the world through
Speaker 1: the kind of this overly hawkish lens because the actually
Speaker 1: weren't thinking about inflation hard enough, like we weren't really
Speaker 1: meeting our inflations inflation in the end date lessons to
Speaker 1: learn This seems to be, you know, we we recently
Speaker 1: had an episode with Minneapolis Fed persident Neil cash Curry,
Speaker 1: and I guess that's sort of implicit in the new
Speaker 1: BED framework. But this seemed us to be the sort
Speaker 1: of um, sort of counterintuitive conclusion that a lot of
Speaker 1: people are arriving at, which is that whereas at one
Speaker 1: point a sort of inflation first perspective may have led
Speaker 1: people down a sort of more hawkish policy path that
Speaker 1: over the last several years, actually taking the inflation mandate
Speaker 1: seriously and taking seriously the idea of hitting the goal
Speaker 1: is the path towards would in theory have led to
Speaker 1: more devish policy, more accommodative either or more accommodative approach.
Speaker 1: I think that's right. I think, you know. Another part
Speaker 1: of it, to the paper kind of suggests is that
Speaker 1: right after the crisis, you know, we had this big
Speaker 1: shock and nobody there was a lot of debate about
Speaker 1: where we really were the business cycle and if the
Speaker 1: stars had changed, and if you've kind of been a
Speaker 1: little bit actually per personally, if you've been a bit
Speaker 1: more model dependent, which is another sort of perhaps anathema
Speaker 1: to a lot of heterodox people. But if you've been
Speaker 1: more model dependent, the models actually are all very uniformly
Speaker 1: revised down. The estimates of our star and potential growth,
Speaker 1: you know, basically two Q one, all of these things
Speaker 1: fall pretty dramatically. The kind of the irony is that
Speaker 1: a lot of the intuitions we'd all developed, and not
Speaker 1: we I was in college, that's done, but a lot
Speaker 1: of intuitions that have been developed over the previous ten
Speaker 1: or twenty years ended up actually betraying forecasters and policymakers
Speaker 1: precisely because they were sort of looking back at a
Speaker 1: period that it was structurally different from the one they
Speaker 1: were now in. But it was hard to recognize it
Speaker 1: unless you just said, we've got two quarters of data,
Speaker 1: I'm gonna trust the model, which you know, you know
Speaker 1: it's hard to do, but I think it's actually one
Speaker 1: of these interesting insights as well. It's not just that
Speaker 1: the inflation mandate became a dobsh thing after so long
Speaker 1: of being hawkish, but then also a lot of models
Speaker 1: that people perhaps had expected to the similar results from
Speaker 1: all of a sudden became the model out but suggested
Speaker 1: we need to really double Dovish policy as well, and
Speaker 1: then sort of policymakers and forecasts forecasters catch up to
Speaker 1: that by called fifteen giver takes. It's an interesting that
Speaker 1: it happens in sort of both sort of them all side,
Speaker 1: but also on the inflation side. So I had a
Speaker 1: sort of geeky question. But one of the things that's
Speaker 1: come up this summer, especially as we sort of watch
Speaker 1: the coronavirus crisis unfold and its impact on the economy,
Speaker 1: is everyone is laser focused on data, and people are
Speaker 1: watching all sorts of different types of data to kind
Speaker 1: of gauge the health of the consumer. I was wondering
Speaker 1: in your model, you're trying essentially to estimate SLACK in
Speaker 1: real time. Could you do that with alternative data? And
Speaker 1: you know, what would that actually look like and how
Speaker 1: much do you think it might change the outcome? You know,
Speaker 1: it's the interesting part about the kind of the COVID
Speaker 1: shock as it hits. It's obviously it's like historically unprecedentably
Speaker 1: bad GDP print in Q two, but if you actually
Speaker 1: kind of look about sort of the normal relationships between
Speaker 1: GDP and unemployment. The unemployment hit is probably much worse
Speaker 1: as sort of an outlier since than as the GDP
Speaker 1: one UM. So it's kind of it's an interesting point
Speaker 1: because it looks like a lot of these kind of
Speaker 1: normal relationships, I don't want to say breakdown during COVID,
Speaker 1: but they certainly become a lot noisier. Um. So it's
Speaker 1: like alternative data has been very helpful, you know, for
Speaker 1: us trying to do forecast and trying to understand where
Speaker 1: the economy is a given moment. You know, Formally incorporating
Speaker 1: that sort of alternative data into what is already a
Speaker 1: pretty big and complicated model becomes more challenging because a
Speaker 1: lot of the problem with these alternative data sets, and
Speaker 1: I think it's true in the financial industry, it's true,
Speaker 1: and lots of parts of economics too, is you know,
Speaker 1: they don't really have very long time histories, and so
Speaker 1: you can sort of try and constrain them to look
Speaker 1: like the series, you know, but you also just made
Speaker 1: up getting to a point where like you're trying to
Speaker 1: add in these new series, but you only have like
Speaker 1: six months of data or you know, like a year
Speaker 1: of data. It's always publicly available and it becomes quite challenge.
Speaker 1: We've been trying to you know, think about that in
Speaker 1: terms of you know, you know, sort of monthly GDP
Speaker 1: estimates and other things that we can sort of use
Speaker 1: to help your sort of now casts right now. Um,
Speaker 1: but it isn't necessarily obvious that adding in all these
Speaker 1: alternative data indicators is necessary really good from a formal sense,
Speaker 1: so much as you have a model, you have all
Speaker 1: this new, interesting, novel data, and you should gut check
Speaker 1: the models outputs on all of this other stuff you
Speaker 1: can look at, but maybe formally incorporating it because of
Speaker 1: you know, statistical stuies and everything else is a bit
Speaker 1: more of a challenge. I think that's probably a place
Speaker 1: where most sort of economists and policy makers been right out.
Speaker 1: This data is very useful, novel, really interesting to play
Speaker 1: around with, very helpful and understanding who in the economy
Speaker 1: has been affected by COVID, But it doesn't necessarily you know,
Speaker 1: have a a lot of bearing on a formal modeling sense,
Speaker 1: just because the data is new and novel, and you know,
Speaker 1: in general you kind of like longer data sets. It's
Speaker 1: it's a bit of a it's been a very tricky
Speaker 1: you know, try challenge trying to map between the two
Speaker 1: sort of novel data and more like kind of classic
Speaker 1: macro variables. I wanna go back to you know, you're
Speaker 1: talking about the sort of generational divides and this is
Speaker 1: this is the recurring theme. It was in the power
Speaker 1: of speeches, this idea of you know, we see pay
Speaker 1: more attention to financial conditions. Um uh, the sort of
Speaker 1: way if we focus on inflation that would have at
Speaker 1: one point that might have inclined policy makers to take
Speaker 1: a more hawkish path, now more devish one. But I
Speaker 1: still don't think I have a sense of like what change,
Speaker 1: Like why what is the theory by which some of
Speaker 1: these sort of like old workhorse approaches suddenly didn't seem
Speaker 1: to work anymore? That's something fundamental about the economy? Ah,
Speaker 1: is there something different? So I think the answer is yes,
Speaker 1: I don't necessarily have as developed an answer for what
Speaker 1: the things that I mean. I can tell you the
Speaker 1: stars that change, but not like the real sort of
Speaker 1: fundamental underlying driving things that changed. You know, It's an
Speaker 1: interesting problem in economics because if you sort of take
Speaker 1: off like the classic sort of equations and you go
Speaker 1: back and estimate them like the sixties and seventies, a
Speaker 1: lot of times you get very good relationships, Like the
Speaker 1: parameters are pretty different from zero, they're very statistically significant,
Speaker 1: and like if you just roll those estimates forward, they
Speaker 1: just become progressively less significant over time. Um, this you know,
Speaker 1: effects our ability to actually make models, but it also
Speaker 1: affects your ability to sort of know that what the
Speaker 1: model is saying is useful. So that's one reason in
Speaker 1: our paper we just add a lot more data than
Speaker 1: most other modeling approaches, because we figure if we have
Speaker 1: like more data, things are easy to pin down. And
Speaker 1: really speaking, I think part of it is that maybe,
Speaker 1: you know, the economy is more forward looking. There's perhaps
Speaker 1: some of it is that there's more you know, higher
Speaker 1: debtloads so everyone can pays more interest interest rates. You know,
Speaker 1: it's it's not necessarily obvious to me what these sort
Speaker 1: of like underlying changes really have been. That it sort
Speaker 1: of makes it's like all the coefficients and all these models,
Speaker 1: it kind of looks like everything just been squashed towards
Speaker 1: having no effect. Like they don't have no effect anymore,
Speaker 1: but they have much smaller effects than they used to.
Speaker 1: You know, it's we don't have a good answer, Joe.
Speaker 1: I mean it's I think if if somebody had a
Speaker 1: particularly good answer for what's sort of driven this change
Speaker 1: over time, that person deserves a much higher sort of
Speaker 1: like pay grade and probably a noble prize. But at
Speaker 1: the moment it's kind of the big open area that econ.
Speaker 1: I don't really see particularly good answers. You know, you
Speaker 1: can do all sorts of like fancy statistical techniques maybe
Speaker 1: like well, actually the coefficients that we do, like these
Speaker 1: seven other things kind of recovering are about the same,
Speaker 1: but it's not quite as satisfying as like saying the
Speaker 1: effect is the same. And so maybe it's just that,
Speaker 1: you know, the the past thoris have changed and it's
Speaker 1: you know, we don't really have particularly good theories of
Speaker 1: expectation formation or sort of how people relate, you know,
Speaker 1: how people's expectations if their behavior and given moment and
Speaker 1: sort of you know, maybe people are more forward looking
Speaker 1: now and that means the models kind of have more
Speaker 1: squashed effects because all of the sort of channels we
Speaker 1: used to think of as like direct behavioral effects are
Speaker 1: now expectations issues. It's hard to say. So I have
Speaker 1: a related question, but you know, if if our store
Speaker 1: is really lower or lower than a lot of people
Speaker 1: have anticipated in recent years, what what are the economic
Speaker 1: conditions that would actually force our star up. So classically
Speaker 1: you would have said an increase in the rate of
Speaker 1: potential growth was sort of one of the main drivers
Speaker 1: of the neutral rate of interest. I'm a little less
Speaker 1: sure about that read on the data. Um you know,
Speaker 1: since the christ even since two thousand, potential growth has
Speaker 1: fallen some our star has fallen by a lot more,
Speaker 1: which would have means that, like the other factors that
Speaker 1: have driven our star the last twenty years kind of dominated,
Speaker 1: you know, part of it maybe just that demographic you know,
Speaker 1: you can't really get around demographic features in the short
Speaker 1: only sort of like relevant policy making horizon, and so
Speaker 1: part of it just maybe with an aging economy and
Speaker 1: sort of higher quote like higher net financial assets that
Speaker 1: leads to lower interest rates because people are like there's
Speaker 1: more saving. Effectively, um inequality could also have an effect
Speaker 1: there as well. That's sort of like a classic kind
Speaker 1: of more not a classic response these it's more than
Speaker 1: a novel response that has become very popular. I think
Speaker 1: that's sort of like in or sort of unequal states
Speaker 1: of the world. You know, rich people spend less of
Speaker 1: their money, therefore they save more, So interest rates fault
Speaker 1: because there's more saving and relatively less investment. That's maybe
Speaker 1: part of it. So you know, perhaps a decrease in
Speaker 1: inequality would raise our star. Um, there's some other more
Speaker 1: interesting theory instead of just that both like our star
Speaker 1: and like the equity risk premium or sort of other
Speaker 1: measures of risk in the economy are kind of connected.
Speaker 1: So like because we've had following rates of potential growth,
Speaker 1: but it seems like the economy has become more risky
Speaker 1: at the same time. That sort of decreased our star,
Speaker 1: but it's kind of raised the equity risk premium. Maybe
Speaker 1: the equity risk channel might be challenged a bit in
Speaker 1: sort of post COVID shock right now. But I think
Speaker 1: generally that those sorts of theories as well, that sort
Speaker 1: of risk behavior and people's risk preferences have both effects
Speaker 1: on our star and the equity risk premium. Kind of
Speaker 1: nice because they sort of tie in, you know, asset
Speaker 1: markets policy and GDP growth and sort of like the
Speaker 1: classic real economy. But it's you know, I'm not sure
Speaker 1: that you could give me a policy that it would
Speaker 1: tell me with a certainty, I would say, yes, that
Speaker 1: will raise our star. It's kind of the honest answers.
Speaker 1: I think a lot of it has to just be,
Speaker 1: you know, hoping for sut a structural reform, even the
Speaker 1: US economies doing relatively welcome to go a lot of
Speaker 1: its other peers. But you know, we can always think
Speaker 1: we can all think of sort of plenty of structural
Speaker 1: issues in the US that could use a bit more
Speaker 1: support or policy changes that might help growth, and he
Speaker 1: sort of help that everything that helps growth will also
Speaker 1: sort of bring up interest rates as well, but it's
Speaker 1: not guaranteed. I want to ask another question that's sort
Speaker 1: of what I would characterize is the sort of heterodox
Speaker 1: critique of all this. And so I sort of already
Speaker 1: you know, already talked about are these staries even worth finding?
Speaker 1: But there's another thing that I think maybe even deeper
Speaker 1: sort of proceeds that logic, which is that a lot
Speaker 1: of heterodox economists would say that within this sort of
Speaker 1: more traditional mainstream approach, that there are certain embedded ideologies
Speaker 1: that you know, you look at a paper, and I
Speaker 1: looked at your paper, but you know, it's all a
Speaker 1: sort of a lot of papers that's like, Okay, you
Speaker 1: have your abstract in the beginning and which I could
Speaker 1: read things in plain English, and then a bunch of
Speaker 1: equations that I gloss over because I don't understand that,
Speaker 1: and then I like read the conclusion and their argument
Speaker 1: might be, or would be, that within those equations that
Speaker 1: what appears to be science or what appears to be
Speaker 1: math is a certain ideology about a being anti too
Speaker 1: much government spending and anti distorting the economy ideology that
Speaker 1: there is such thing as too much employment and that
Speaker 1: there is such thing as too much uh this implicit
Speaker 1: idea that maybe it's dangerous if there's if we get
Speaker 1: too much full employment and so forth. And I'm curious,
Speaker 1: like what you make of that because I never have
Speaker 1: done academic uh econ. I just learned about it from
Speaker 1: talking to folks like you. But in your view, what
Speaker 1: do you make of that critique that there is sort
Speaker 1: of a sort of anti government spending, anti labor um
Speaker 1: i I geology embedded in this, which then translates into
Speaker 1: actual policies of raising the interest rate too soon even
Speaker 1: though we're not at full employment, or raising interest rates
Speaker 1: in response to stimulus to sort of blunt the effect
Speaker 1: of uh fiscal policy, and that basically what appears to
Speaker 1: be science and math is really uh sort of politics. Yeah,
Speaker 1: I'm a little skeptical of the it's all actually, you know,
Speaker 1: economists have the sort of deep seated kind of conservative
Speaker 1: bias kind of view of the world. I mean, I
Speaker 1: am one, and I don't necessarily think of myself particularly conservatives.
Speaker 1: I think that's there's that, But also I think more generally,
Speaker 1: when I was sort of approaching this paper, and I
Speaker 1: think we're all like I think a lot of heterodox
Speaker 1: people think about maybe sort of like the classic theories
Speaker 1: of the like the sixties and seventies, with like perfect
Speaker 1: markets everything is in equilibrium all the time. And I
Speaker 1: sort of still assume that everything that's been written since
Speaker 1: by like people in the mainstream still sort of flows
Speaker 1: from that same sort of set of set of assumptions.
Speaker 1: But I think, you know, when you look around it
Speaker 1: kind of cutting edge e con intoat of any field,
Speaker 1: it's almost you know, whether it's you know, macro, it
Speaker 1: is like subset of micro it doesn't really make those
Speaker 1: sorts of assumptions anymore. A lot of times it's like
Speaker 1: asking very very detailed and specific questions, you know, how
Speaker 1: do we get the best policy interventions, you know, given
Speaker 1: that there are constraints to real resources, or you know,
Speaker 1: perhaps yes, perhaps even assuming that there are constraints to
Speaker 1: the government's ability to spend um. Heterodoxic people might do
Speaker 1: that as like, you know, a very dramatic take. But
Speaker 1: you know, in one sense, I kind of understand the
Speaker 1: mechanical logics and them m T argument, but well probably
Speaker 1: you know, I don't think there's really conservative bias. And
Speaker 1: when I look at this paper, I see ptistical relationships
Speaker 1: between data and like a point of two percent inflation
Speaker 1: that the FETT has kind of tould us it wants
Speaker 1: to hit over the long run, and then everything else
Speaker 1: kind of revolves around. So you know, if there's a deep,
Speaker 1: you know, intellectual bias inside of us, you know, it's uh,
Speaker 1: you know, my my coauthins and I weren't particularly aware
Speaker 1: of it. Maybe it's still there, but it doesn't really
Speaker 1: sprend me as right. I think, you know, the errors
Speaker 1: that were made before the crisis and regulatory policy or
Speaker 1: after the crisis in terms of understanding how monetary policy involved,
Speaker 1: like you know, a lot of it's just inertial behavior.
Speaker 1: We you know, we read something, we think it's great, persuasive,
Speaker 1: we sort of anchor to it. Our behavior sort of
Speaker 1: adapts pretty slowly under normal times, and maybe after a
Speaker 1: big shock it adapts a little bit faster, but it's still,
Speaker 1: you know, our own sort of built up wisdom is there.
Speaker 1: And I guess, you know, maybe that is an aspect
Speaker 1: that they're critiquing. But the problem is that, in the end,
Speaker 1: you know, policy making decisions are made by relatively small
Speaker 1: groups of people, and you know, if they were just
Speaker 1: continuously bombarded by seven hundred different papers trying to explain
Speaker 1: everything in the world with an infinite number of approaches,
Speaker 1: you can never make a decision. And so I think
Speaker 1: the policymakers kind of need is under you know, reasonably
Speaker 1: built and developed papers that are approached, modeling approaches that
Speaker 1: are taken to account conditions in the real world, make
Speaker 1: reasonable set of assumptions about the real world, and then
Speaker 1: hopefully we do get policy outcomes. But I think, you know,
Speaker 1: the notion that there's kind of like a dark force
Speaker 1: driving everything, maybe it's self interested to sort of think that,
Speaker 1: But you know, I've always been a little skeptic just
Speaker 1: on that note. I mean We've been talking a lot
Speaker 1: on all thoughts about this idea of a handoff from
Speaker 1: monetary policy to fiscal policy. Is the suggestion from the
Speaker 1: stars discussion um and and the idea that you know,
Speaker 1: if we get the stars right, we can actually calibrate
Speaker 1: monetary policy correctly. Is the implication that monetary policy, you know,
Speaker 1: isn't um completely useless and can actually generate growth and inflation. Well,
Speaker 1: I remain fully confident that monetary policy will continuously generate
Speaker 1: complaints by almost everyone across the IDEO. But now I
Speaker 1: think that's you know, going forward. I think the FEDS
Speaker 1: Framework reviews sort of suggests an approach which is consistent
Speaker 1: with you know, these sorts of model based testaments. And
Speaker 1: I think you know a lot of people see action
Speaker 1: as being useful, and you know, the FED, I'm sure
Speaker 1: it's having some internal debates about you know, what more
Speaker 1: policy actions they could do. What are the rest policy actions,
Speaker 1: the best policy actions kind of just sitting there and
Speaker 1: you know, letting their new approach and take time, but
Speaker 1: like lower for longer the interest rate policies, which of
Speaker 1: our paper, thanks you can have been natural conclusion of
Speaker 1: a lot of this like that is still a policy stands.
Speaker 1: It's not maybe not necessarily one that people love, given
Speaker 1: the nature of it is slow, inertial, and non dramatic.
Speaker 1: But that's sort of what comes out of the model
Speaker 1: is that if you have to zero lower bound, we think,
Speaker 1: you know, negative interest rates are like usible in the US,
Speaker 1: then the best policy stances to be as supportive as
Speaker 1: you can be. We're kind of as long as you know,
Speaker 1: until inflation is sustainably at two per cent or you know,
Speaker 1: slightly over it, so you can sort of maintain the
Speaker 1: two percent average. You know, it's not like a policy
Speaker 1: regime that I think people get excited about because it
Speaker 1: means the policy is going to be quite low, like
Speaker 1: inertial and stable. But I think that's the policy regime
Speaker 1: which is helpful and meet you know, using the interest
Speaker 1: rate policy instrument as the way to try and achieve
Speaker 1: two percent inflation and maximum employment. You know, that seems
Speaker 1: pretty reasonable and it just kind of ties back into
Speaker 1: your question minute you go on the heterodox side, Joe,
Speaker 1: if we think there's like some amount of like transitional
Speaker 1: unemployment or an even a point like a three point
Speaker 1: nine percent or four percent and a long run unemployment target,
Speaker 1: it's only slightly above like the frictional unemployment, Like that's
Speaker 1: pretty close to maximum employment. And so I think it's
Speaker 1: like it's interesting that some of those heterodox fritiques that
Speaker 1: it would have been made about. You know, economists, you're
Speaker 1: always trying to sort of h one higher employment to
Speaker 1: keep inflation stable, like you know, four percent unemployment is
Speaker 1: very few people being unemployed on anything more than sort
Speaker 1: of a very transitional basis. Peter, Uh, that was really
Speaker 1: really amazing. Um, thank you so much for simultaneously going
Speaker 1: into you know, great academic depth but also making everything
Speaker 1: really understandable. Thanks so much, and thank you for defending
Speaker 1: the entire economics profession. Someone had to come on lots
Speaker 1: and do it. Joe, all right, that was great for Peter,
Speaker 1: Thank you so much. Thank you all so, Joe. I
Speaker 1: I really enjoyed that discussion. I'm trying to think of
Speaker 1: a way to sum it all up because it was
Speaker 1: such a wide ranging discussion. But I think the sort
Speaker 1: of last note that we left it on this idea
Speaker 1: that maybe monetary policy is hasn't been completely neutered. It's
Speaker 1: just we've we've gotten some basic assumptions incorrect, like part
Speaker 1: of me finds that notion quite optimistic and quite hopeful,
Speaker 1: maybe because I'm pessimistic about the prospect of governments, you know,
Speaker 1: really getting their act together and enacting fiscal stimulus. So
Speaker 1: I want to see monetary policy help out a little bit.
Speaker 1: You know, Tracy, are you skeptical that governments will get
Speaker 1: their act together or you like skeptical that government is
Speaker 1: getting their act together is a good thing? Uh? Both,
Speaker 1: I would say I'm double skeptical, I know, but it's true, right, like,
Speaker 1: even if people could agree to do something, the chances
Speaker 1: of them doing something that's well designed, um, I think
Speaker 1: are pretty low. But anyway, our star Peter was great
Speaker 1: and it was certainly refreshing because you know, it's like, uh,
Speaker 1: we have so we talked to a lot of people
Speaker 1: that bash this stuff pretty much all the time, and
Speaker 1: we've had like a sort of like stream of sort
Speaker 1: of heterodox in some way or another thinkers and so
Speaker 1: but look, you know, it's like, hey, we have the Fed,
Speaker 1: we have the central banks, they have their mandate, they
Speaker 1: have their jobs. There are economics departments around the world,
Speaker 1: And I thought Peter sort of made a very compelling
Speaker 1: defense of like how the you know the approach that
Speaker 1: a lot of these economists and central banks are taking
Speaker 1: and essentially how they can be salvage because I think
Speaker 1: what he's going for, yeah, I think that's exactly right.
Speaker 1: But also I think he put it quite well in
Speaker 1: the sense that you need some sort of guiding principle
Speaker 1: in order to make monetary policy decisions, and it feels
Speaker 1: like variables like the stars are kind of the best
Speaker 1: you're going to come up with, and so it becomes
Speaker 1: essential to really study those and write papers like this
Speaker 1: and make sure that you're fully understanding them. I agree,
Speaker 1: and I think that like whether we talk about monetary
Speaker 1: policy uh sort of centric stabilization or fiscal policy centric stabilization,
Speaker 1: that problem will never go away the idea of like, Okay,
Speaker 1: whatever you're going to do, what are the variables that
Speaker 1: you're going to use. So it's like, you know, you
Speaker 1: could say, like all right, let's have you know, fiscal
Speaker 1: stimulus be our primary engine, but that doesn't really get
Speaker 1: you away from the problem of the sort of determining like, oh,
Speaker 1: is inflation actually becoming a problem now? Is there's no
Speaker 1: is that this temporary? Does everyone who wants a job
Speaker 1: have one? And so forth. So there's almost sort of
Speaker 1: no getting away from these questions regardless of the policy regime. Yeah,
Speaker 1: I think that's exactly right. And full employment kind of
Speaker 1: seems like the obvious one to focus on here, Like,
Speaker 1: if you are designing fiscal policies or some sort of
Speaker 1: job guarantee program or universal basic income or something like that,
Speaker 1: and you're trying to get to a place of full employment,
Speaker 1: you better have a good idea of what that place
Speaker 1: actually is and what it looks like. So, yeah, the
Speaker 1: questions aren't going away, even if we do get that
Speaker 1: long awaited handoff from monetary policy the fiscal Yeah, that's
Speaker 1: exactly all right. Um, should we leave it there? Okay?
Speaker 1: This has been another episode of the add Thoughts podcast
Speaker 1: on Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe Why Isn't All? You can
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