Revisiting Monetary Policy in a Low Inflation Environment

October 14-16, 2010
Federal Reserve Bank of Boston

The past decade, underscored by the recent financial and economic crises, has shaken the confidence many economists have in some of the received conventional wisdom regarding monetary and macroeconomic policy. The decade featured two episodes of the federal funds rate at or near the zero lower bound, two periods of uncomfortably low inflation, and the first significant use of alternative monetary policy tools to stabilize the economy when conventional policy was constrained.

In the wake of this tumult, this conference aims to spur discussion on a number of questions about which we must admit a considerable degree of humility. Are we likely to be constrained by the zero lower bound more often than we had earlier estimated? If so, do we have sufficient confidence in our alternative monetary policy tools to stabilize the economy in the face of adverse shocks? Might central banks reconsider the optimal level of inflation in light of these experiences? And has our profession given sufficient consideration to the extent to which monetary and fiscal policies can and should overlap?

October 14 | October 15 | October 16

Thursday, October 14

6:00 p.m. Reception & Dinner

 

Friday, October 15

8:15 a.m. Conference Commencement & Opening Remarks
  Welcome: Eric S. Rosengren
President and Chief Executive Officer
Federal Reserve Bank of Boston

 

Keynote Address:

The Honorable Ben S. Bernanke
Chairman
Board of Governors of the Federal Reserve System
     Remarks offsite

9:15 a.m.

Break

9:45 a.m.

Today's sessions are moderated by J. Christina Wang, Senior Economist, Federal Reserve Bank of Boston

What Have We Learned about Monetary Policy in a Low Inflation Environment? A Review of the 2000s

This session will provide an overview of the experience of the first decade of the twenty-first century, with particular attention paid to the issues being examined in more detail in subsequent sessions.

Presenter:

Richard H. Clarida
C. Lowell Harriss Professor of Economics
Columbia University
    Paper pdf
    Presentation pdf

  Discussants:

N. Gregory Mankiw
Robert M. Beren Professor of Economics
Harvard University

John B. Taylor
Mary and Robert Raymond Professor Economics
Stanford University
    Presentation pdf

11:15 a.m.

Break

11:30 a.m. Have We Underestimated the Probability of Hitting the Zero Lower Bound?

In 1999 at the joint Federal Reserve System conference on monetary policy in a low inflation environment, most participants were reasonably sanguine about the likelihood of hitting the zero lower bound (ZLB) and about the central bank’s ability to use alternative tools to stabilize the economy in that event. Were the estimates from that era accurate? Or should recent experience lead us to re-estimate the probability of hitting the ZLB? How robust are estimates of the probability of hitting the ZLB to model specification? What are our current best estimates of the costs of hitting the ZLB constraint? What has recent experience taught us about the effectiveness of alternative interest-rate policies (nonlinear and expectations-based) in mitigating the costs?

  Presenters:




John C. Williams
Executive Vice President and Director of Research
Federal Reserve Bank of San Francisco

Hess Chung
Board of Governors of the Federal Reserve System

David L. Reifschneider
Senior Associate Director, Division of Research and Statistics
Board of Governors of the Federal Reserve System
    Paper pdf
    Presentation pdf

  Discussants:

Marvin Goodfriend
Professor of Economics and Chairman, The Gaillot Center for Public Policy
Carnegie Melon Tepper School of Business
    Presentation pdf

Andrea Tambalotti
Senior Economist
Federal Reserve Bank of New York
    Presentation pdf

1:00 p.m.

Lunch

2:15 p.m. The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment

The last several years have marked the first time that most advanced economies—with the notable exception of Japan—have used alternative monetary policies to stabilize the economy when the inflation rate was pinned at the zero lower bound. What have we learned from this relatively recent experience? How effective were such tools in the United States and in other similarly constrained economies?

  Presenter:

James D. Hamilton
Professor of Economics
University of California at San Diego
    Paper pdf
    Presentation pdf

  Discussants:

James McAndrews
Executive Vice President and Director of Financial Research
Federal Reserve Bank of New York
    Presentation pdf

Laurence H. Meyer
Senior Managing Director and Co-Founder
Macroeconomic Advisors
    Discussion pdf
    Presentation pdf

3:45 p.m.

Break

4:00 p.m Inflation Dynamics When Inflation is Near Zero
The recent behavior of inflation suggests that it may behave differently when inflation is near zero than otherwise. Recent Phillips curve estimates suggest a smaller influence of gap variables than historically has been the case. The importance of expectations that are “anchored” on a central bank inflation goal may also play a role. The experience in Japan, in which prolonged periods of economic slack were not accompanied by a continual downward spiral in inflation, also raises questions about inflation dynamics in a very low inflation environment. What does the recent evidence tell us about the likely behavior of inflation going forward? How does recent experience change our assessment of the probability of deflation? What role does downward rigidity in wages play? How much do the conclusions to these questions depend on the way in which one models inflation, including the role of model-consistent (or other) expectations?
  Presenters:

Jeffrey C. Fuhrer
Executive Vice President and Director of Research
Federal Reserve Bank of Boston

Giovanni P. Olivei
Vice President and Economist
Federal Reserve Bank of Boston

Geoffrey M. B. Tootell
Senior Vice President and Deputy Director of Research
Federal Reserve Bank of Boston
    Paper pdf
    Presentation pdf

  Discussants:

William T. Dickens
Distinguished Professor of Economics and Social Policy
Northeastern University
    Presentation pdf

Peter Hooper
Chief Economist
Deutsche Bank Securities
     Discussion pdf

5:30 p.m. Adjournment
6:00 p.m.

Reception & Dinner


Saturday, October 16

8:15 a.m. Conference Remarks
  Speaker:

Eric S. Rosengren
President and Chief Executive Officer
Federal Reserve Bank of Boston
     Remarks

8:45 a.m.

Today's sessions are moderated by Giovanni Olivei, Vice President and Economist, Federal Reserve Bank of Boston

Reconsidering the Optimal Rate of Inflation

Since the mid-to-late 1990s, the general consensus on inflation targeting has held that a 2 percent inflation rate is the best long-run goal. Yet several prominent economists have recently put forward the bold suggestion that central banks might now consider raising their inflation goal in light of concerns about the zero lower bound, the effectiveness of alternative monetary policy instruments, and the possibility of deflation. This session will examine this proposition from multiple perspectives, including optimal taxation and the optimality of the Friedman rule.

  Presenter:

Bennett T. McCallum
H. J. Heinz Professor of Economics                          
Carnegie Mellon University
    Paper pdf
    Presentation pdf

  Discussants:

Joseph E. Gagnon
Senior Fellow
Peterson Institute for International Economics
     Discussion pdf

Julio J. Rotemberg
William Ziegler Professor of Business Administration
Harvard Business School
    Discussion pdf
    Presentation pdf

10:15 a.m.

Break

10:45 a.m. Fiscal/Monetary Policy Interactions and Ambiguities in a Low Inflation Environment

Recent experiences in the United States and other advanced nations have stretched the usual distinction between monetary and fiscal policy. In part, the traditional distinction centers on the premise that the central bank should not take on credit risk, whereas the country’s treasury may do so. But it also involves consideration of the extent to which asset purchase programs focusing on particular sectors of the economy may constitute redistributive fiscal policy. This session will discuss the increasingly ambiguous boundaries between fiscal and monetary policy given the low inflation environment, and how permeable these boundaries have been and should be.

  Presenter: Christopher A. Sims
Harold H. Helm ’20 Professor of Economics and Banking
Princeton University
    Presentation pdf

 

Discussants:

Benjamin M. Friedman
William Joseph Maier Professor of Political Economy
Harvard University

Matthew C. Weinzierl
Assistant Professor of Business Administration
Harvard Business School
    Presentation pdf

12:15 p.m.

Lunch

1:30 p.m. Policy Panel on Recent International Experiences

The recent financial and economic crisis was, more than any other episode in the past several decades, an international crisis. Central banks around the world pursued similar policies in many cases, but the experiences were not identical across countries. This panel will draw out the common lessons learned from the experience, while highlighting important differences in the policy approaches of central banks.

 

Panelists:

Alan S. Blinder
Gordon R. Rentschler Memorial Professor of Economics
Princeton University
    Presentation pdf

Charles L. Evans
President and Chief Executive Officer
Federal Reserve Bank of Chicago
    Remarks offsite
    Presentation pdf

Richard Portes
Professor of Economics, London Business School and
President, Centre for Economic Policy Research
    Presentation pdf

Kazuo Ueda
Faculty of Economics
University of Tokyo
    Paper pdf
    Presentation pdf

3:00 p.m.

Conference Adjournment