thomas a. lubik federal reserve bank of richmond
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Discussion of Communicating Monetary Policy Intentions: The Case of Norges Bank by Amund Holmsen. Thomas A. Lubik Federal Reserve Bank of Richmond. My favorite sentence in the paper is the last:. - PowerPoint PPT PresentationTRANSCRIPT
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Thomas A. LubikFederal Reserve Bank of Richmond
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My favorite sentence in the paper is the last:
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My favorite sentence in the paper is the last:
“If nothing else, the Bank’s communication approach should make better economists.”
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My favorite sentence in the paper is the last:
“If nothing else, the Bank’s communication approach should make better economists.”
This nicely captures the spirit of the paper
But let’s start at the beginning …
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OverviewMonetary policy has come a long way:
Not so long ago central banks were very secretive, now they worry about communications strategy
Widespread use of estimated DSGE models
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OverviewMonetary policy has come a long way:
Not so long ago central banks were very secretive, now they worry about communications strategy
Widespread use of estimated DSGE models
Driven by intellectual environment:Keynesian aggregate demand thinking is passéMonetary policy has to do with controlling
inflation: Hetzel (2008)
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OverviewMuch of the advances in monetary
policymaking pushed by a few SOE central banks: RBNZ: inflation targetingRiksbank: Bayesian DSGE modellingNorges Bank: transparency and
communication
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OverviewMuch of the advances in monetary
policymaking pushed by a few SOE central banks: RBNZ: inflation targetingRiksbank: Bayesian DSGE modellingNorges Bank: transparency and communication
Federal Reserve is slowly getting there:Hints of an inflation targetLonger policy projections
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April 29 FOMC Statement
“The Committee […] anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
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Norges Bank and TransparencyNorges Bank has published model-based
endogenous interest-rate forecasts since November 2005
Transparency strategy includes:Probabilistic statements about future policyExplicit conditioning on shock distributionOpenness about policy maker’s preferences
Key is willingness to put a policy rule on the line:CB reacts to shocks and unforeseen developmentsPolicy response as a general equilibrium outcome
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Norges Bank and TransparencyTransparency has arguably been quite
successful:Reduction in interest volatilityMarket expectations close to forecasts
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The Costs of TransparencyGoodfriend’s (1986) “Monetary Mystique”Two concerns:
NoiseCommitment to policy path
Theoretical case can be made that a better informed, but secretive trader is beneficial
Concerns that central bank adds noise seem excessive
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The Costs of TransparencyMore relevant: public might interpret interest
path as a promise, deviation might be interpreted as discretion
This can be handled by the right communication strategy:Fan chartsInterest rate accountPress conferences
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The Interest Rate Account
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08 Q3 09 Q1 09 Q3 10 Q1 10 Q3 11 Q1 11 Q3
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Higher demand in NorwayHigher inflation in NorwayHigher interest rates abroadHigher risk premium in the money marketLower growth abroadChanges in the interest rate path
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The Benefits of TransparencyCommitment is more important than
transparencyThere are certainly decreasing returns:
Objective/TargetInstrumentsForecastsPolicy PathsParameter estimates in the DSGE-Model?
In the big scheme of things, the last steps are of second order
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The Benefits of TransparencyIs transparency a fair weather issue?Arguably, more open communications in the
last few years gave central banks breathing room to pursue unconventional measures
Transparency does not require the use of a DSGE model
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NEMOTypical SOE-DSGE model with the usual bells
and whistlesSmall-scale medium-sized model
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NEMOTypical SOE-DSGE model with the usual bells
and whistlesSmall-scale medium-sized modelStriking omission (2006 version): Oil
Oil investmentOil fund distributions as a residual in the
current accountOil producing sector unmodelledRelative price effect on inflation
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Oil
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Policy PreferencesOptimal policy minimizes ad-hoc loss function
from a “timeless perspective”Where do the weights come from?Why not use Ramsey as the benchmark?
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Policy PreferencesOptimal policy minimizes ad-hoc loss function
from a “timeless perspective”Where do the weights come from?Why not use Ramsey as the benchmark?
Key contribution of the micro-foundation approach is not that we have optimization-based decision rules, but that we can talk about the effects of policy on welfare in a meaningful way
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Back to the end:
“If nothing else, the Bank’s communication approach should make better economists.”
This guarantees central bank jobs for generations of future PhDs
But there are deeper issues …
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Who is the Audience?Public likely to be unimpressed by Bayesian
DSGE modelsPolicymakers are given an additional tool,
competition with other modelsOptimal policy exercises in estimated DSGE
models are a tool to elicit policymaker’s preferences
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Monetary Policy as Engineering?DSGE-based approach creates illusion of
controllability
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Monetary Policy as Engineering?DSGE-based approach creates illusion of
controllabilityWe’ve been there before:
1972-74 were the heydays of the “large-scale macro- econometric model”
Making policy was simply an optimal control problem
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Monetary Policy as Engineering?DSGE-based approach creates illusion of
controllabilityWe’ve been there before:
1972-74 were the heydays of the “large-scale macro- econometric model”
Making policy was simply an optimal control problem
We know how this ended
And arguably no amount of transparency could have prevented this …
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Monetary Policy as Engineering!Should not get carried too much away by the
use of DSGE model in the policy processCurrent crop of state-of-the-art DSGE models:
Not rich enoughNot identified
Parameter and model uncertainty should be much more taken into account
Bayesian model averagingCommittee approach: there’s wisdom in crowds
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To SummarizeNorges Bank’s approach is laudable:
Take recent developments in macro very seriously; can’t be all bad
Provides employment for PhD economists