Tuesday, June 21, 2016

Attitude Adjustment

For this post, note the disclaimer at the top of the page. I'm just speaking for myself here, and my views do not necessarily reflect those of the St. Louis Fed, the Federal Reserve System, or the Board of Governors.

This is a reply to Narayana's recent Bloomberg post, which is a comment on this St. Louis Fed memo.

First, Narayana says that Jim Bullard thinks that
... the economy is so weak that a mere quarter-percentage-point increase would be enough for the foreseeable future.
I don't think the memo actually characterizes the economy as "weak" - it's not a pessimistic view of the world as, for example, Larry Summers or Robert Gordon might see it. As I noted in this post, one would not characterize the labor market as "weak." It's in fact tight, by conventional measures that we can trust. The view in the St. Louis Fed memo is that growth in real GDP, at 2% per annum, is likely to remain lower than the pre-financial crisis trend for the foreseeable future - i.e. "weaker" than we've been accustomed to. But "so weak" is language that is too pessimistic. And there remains the possibility that this will turn around.

Second, Narayana says:
Bullard’s rationale focuses on productivity...
That's not correct. The memo mentions low productivity growth, but a key part of the argument is in terms of low real rates of interest. According to conventional asset pricing and growth theory, low productivity growth leads to low consumption growth, which leads to low real rates of interest. But that effect alone does not seem to be strong enough to explain the fall in real interest rates in the world that has occurred for about the last 30 years or so. There is another effect that we could characterize as a liquidity premium effect, which could arise, for example, from a shortage of safe assets. I've studied that in some of my own work, for example in this paper with David Andolfatto. In recent history, the financial crisis, sovereign debt problems, and changes in banking regulation have contributed to the safe asset shortage, which increases the prices of safe assets, and lowers their yields. This problem is particularly acute for U.S. government debt. A key point is that a low return on government debt need not coexist with low returns on capital - see the work by Gomme, Ravikumar, and Rupert cited in the memo.

Third, Narayana thinks that:
Bullard uses a somewhat obscure measure of inflation developed by the Dallas Fed, rather than the Fed’s preferred measure, which is well below 2 percent and is expected to remain there for the next two to three years.
"Obscure," of course, is in the eye of the beholder. Let's look at some inflation measures:
The first measure is raw pce inflation - that's the Fed's preferred measure, as specified here. The second is pce inflation, after stripping out food and energy prices - that's a standard "core" measure. The third is the Dallas Fed's trimmed mean measure. Trimmed mean inflation doesn't take a stand on what prices are most volatile, in that it strips out the most volatile prices as determined by the data - it "trims" and then takes the mean. Then we calculate the rate of growth of the resulting index. One can of course argue about the wisdom of stripping volatile prices out of inflation measures - there are smart people who come down on different sides of this issue. One could, for example, make a case that core measures of inflation give us some notion of where raw pce inflation is going. For example, in mid-2014, before oil prices fell dramatically, all three measures in the chart were about the same, i.e. about 1.7%. So, by Fisherian logic, if the real interest rate persists at its level in mid-2014, then an increase in the nominal interest rate of 50 basis points would make inflation about right - perhaps even above target. Personally, I think we don't use Fisherian logic enough.

Finally, Narayana says:
...the risk of excess inflation is relatively manageable.
That's a point made in the memo. The forecast reflects a view that Phillips curve effects are unimportant, and thus an excessive burst in inflation is not anticipated.

Here's a question for Narayana: Why, if a goal is to have "capacity to lower rates" in the event of "say, global financial instability," does he want rates reduced now?

Should We Think of Confidence as Exogenous?

I don't always agree with Roger Farmer, but I admire his independence. Roger doesn't like to be bound by the constraints of particular research groups, and typically won't accept the assumptions decreed by some New Keynesians, Monetarists, New Fisherites, or whoever. Farmer is a Farmerite. But, Roger falls into a habit common to others who call themselves Keynesians, which is to describe what he does in terms of some older paradigm. The first time I saw Roger do this was in 1994, when he gave this paper at a Carnegie-Rochester conference. The paper was about quantitative work on a class of models which were one step removed from neoclassical growth models. Such models, with unique equilibrium and exogenous stochastic productivity shocks, had been used extensively by real business cycle (RBC) proponents, but Roger's work (and that of other people, including Jess Benhabib) was aimed at studying indeterminacy and endogenous fluctuations. The indeterminacy in Roger's work came from increasing returns to scale in aggregate production. Sufficient increasing returns, he showed, permitted sunspot equilibria, and those equilibria could look much like the stochastic equilibria in RBC models. That seemed promising, and potentially opened up a role for economic policy aimed at dealing with indeterminacy. Old Keynesian economics says we should offset exogenous shocks with fiscal and monetary policy; baseline RBC theory says such stabilization policy is a waste of time. But with indeterminacy, policy is much more complicated - theoretically, we can construct policies that eliminate particular equilibria through off-equilibrium promises. In equilibrium, we wouldn't actually observe how the policymaker was doing his or her job. While promising, this approach introduced some challenges. How do we deal econometrically with indeterminacy? How would we know if real-world policymakers had actually figured out this problem and were solving it?

Though teaching and entertaining ourselves has a lot to recommend it, most economists are interested in persuading other people of the usefulness of their ideas. Though I haven't had a lot of experience with dissemination of ideas in other professions, I think economists are probably extreme in terms of how we work out ideas in public. Seminars and conferences can be combative. We have fun arguing with each other, to the point where the uninitiated find us scary. And all economists know it's an uphill battle to get people to understand what we're doing, let alone to have them think that we've come up with the greatest thing since indoor plumbing. There's an art to convincing people that there are elements of things they know in our ideas. That's intution - making the idea self-evident, without making it seem trivial, and hence unpublishable (horrors).

So, what does this have to do with Roger, indeterminacy, and 1994? In the talk I heard at CMU in 1994, to make his paper understandable Roger used words like "demand and supply shocks," "labor supply and demand curves," and, particularly, "animal spirits." Given that language, one would think that the elements of the model came from the General Theory and textbook AS/AD models. But that was certainly not the case. The elements of the model were: (i) the neoclassical growth model, which most of the people in the room would have understood; (ii) increasing returns to scale which, again, was common currency for most in the room; (iii) sunspot equilibria, which were first studied in the late 1970s by Cass and Shell. This particular conference was in part about indeterminacy, so there were people there - Russ Cooper, Mike Woodford, Rao Aiyagari, for example - who understood the concept well, and could construct sunspot equilibria if you asked them to. But there were other people in the room - Alan Meltzer for example - who would have no clue. But having Roger tell the non-initiated that his paper was actually about AD/AS and animal spirits would not actually help anyone understand what he was doing. If Roger had just delivered his indeterminacy paper in unadulterated form, no undergraduate versed in IS-LM AS-AD would have have drawn any connection, and if Keynes had been in the room he would not have seen any similarity between his work and Roger's ideas. But once Roger said "animal sprits," Keynes would have thought, "Oh, now I get it." He would have left the conference with the impression that Roger was just validating the General Theory in a more technical context. And he would have been seriously mislead.

Roger was hardly the first macroeconomist who made use of language from the General Theory, or Hicksian IS-LM, or post-Hicksian static AS-AD language, to provide intuition for ideas they thought might appeal to people schooled in those traditions. Peter Diamond did it in 1982 – “aggregate demand” was in the title of the paper in which Diamond constructed a model with search and increasing returns in the matching function. That model could give rise to multiple steady states – equilibria with high output and low "unemployment" could coexist with equilibria with low output and high unemployment. If you knew some combination of one-sided search models, the Phelps volume, or had seen work by Dale Mortensen and Chris Pissarides on two-sided search, you could get it. People like Peter Howitt, Ken Burdett, and John Kennan could get it, because they were Northwestern students and been in contact with Mortensen. But an IS-LM Keynesian wouldn’t get it. For those people using the words “aggregate demand” is a dog whistle – a message that everything is OK. “Don’t worry, we’re not doing anything that you would object to.”

New Keynesians took some of these lessons in presentation to heart, and went far beyond dog whistles. A New Keynesian model is basically a neoclassical growth model with exogenous aggregate shocks, and with sticky prices in the context of price-setting monopolistically-competitive firms - and with something we could think of as monetary policy. Again, Keynes would not have the foggiest idea what this was about, but in some incarnations (three-equation reduced form), this was dressed up in a language that had for been taught to undergraduates for about thirty years prior to the advent of New Keynesian frameworks in the late 1990s – the language of “aggregate demand,” “IS curves,” and “Phillips curves.”

New Keynesian economics was no less radical than what Lucas, Prescott, and others were up to in the 1970s and 1980s, but Lucas and Prescott were very in-your-face about what they did. That’s honest, and refreshing, but getting in the faces of powerful people can get you in trouble. I think Mike Woodford learned from that. Better to calm the powerful people who might have a hard time understanding you – get them on your side, and give them the impression that they get it. If Woodford had been in-your-face like Lucas and Prescott, he would probably have the reputation that, perhaps surprisingly, Lucas and Prescott still enjoy among some Cambridge (MA) educated people of my generation. For some, Lucas and Prescott are put in a class with the low life of society – Ponzi schemers, used car salespeople, and other hucksters. Not by the Nobel committee, fortunately.

But, there’s a downside to being non-confrontational. Woodford’s work, and the work of people who extended it, and did quantitative work in that paradigm, is technical – no less technical than the work of Lucas, Sargent, Wallace, Prescott, etc., from which it came. Not everyone is going to be able to do it, and not everyone will get it if it is presented in all its glory. But the dog whistles, and other more explicit appeals to defunct paradigms - or ones that should be - makes some people think that they get it. And when they think they get it, they think that the defunct paradigms are actually OK. And, if the person that thinks he or she gets it is making policy decisions, we’re all in trouble.

Why are we in trouble? Here’s an example. I could know a lot more math and econometrics than I do, and I’ve got plenty of limitations, as we all do. But I’ve had a lot of opportunities to learn firsthand from some of the best people in the profession – Rao Aiyagari, Mark Gertler, Art Goldberger, John Geweke, Chuck Wilson, Mike Rothschild, Bob Lucas, Ed Prescott, Larry Christiano, Narayana Kocherlakota, etc., etc. But I couldn’t get NK models when I first saw them. What’s this monetary model with no money in it? Where’s that Phillips curve come from? What the heck is that central bank doing without any assets and liabilities? I had to read Woodford’s book (and we know that Woodford isn’t stingy with words), listen to a lot of presentations, read some more papers, and work stuff out for myself, before I could come close to thinking I was getting it. So, trust me, if you hear the words “IS curve,” “Phillips curve,” “aggregate demand,” and “central bank,” and think you’ve got NK, you’re way off.

Way off? How? In this post, I wrote about a simplified NK model, and its implications. Some people seem to think that NK models with rational expectations tell us that, if a central bank increases its nominal interest rate target, then inflation will go down. But, in my post, I showed that there are several ways in which that is false. NK models in fact have Fisherian properties – or Neo-Fisherian properties, if you like. Fortunately, there are some people who agree with me, including John Cochrane and Rupert and Sustek. But, in spite of the fact that you can demonstrate how conventional macroeconomic models have Neo-Fisherian properties – analytically and quantitatively – and cite empirical evidence to back it up, the majority of people who work in the NK tradition don’t believe it, and neither do most policymakers. Part of this has to do with the fact that there indeed exists a model from which one could conclude that an increase in the central bank’s nominal interest rate target will decrease inflation. That model is a static IS-LM model with a Phillips curve and fixed (i.e. exogenous) inflation expectations. That’s the model that many (indeed likely the majority) of central bankers understand. And you can forgive them for thinking that’s roughly the same thing as a full-blown NK model, because that’s what they were told by the NK people. Now you can see the danger of non-confrontation – the policymakers with the power may not get it, though they are under the illusion that they do.

I know I’m taking a circuitous route to discussing Roger’s new paper, but we’re getting there. A few years ago, when Roger started thinking about these ideas and putting the ideas in blog posts, I wrote down a little model to help me understand what he was doing. Not wanting to let that effort go to waste, I expanded on it to the point where I could argue I was doing something new, and submitted it to a journal. AEJ-Macro rejected it (an unjust decision, as I’m sure all your rejections are too), but I managed to convince the JMCB to take it. [And now I'm recognizing some of my errors - note that "Keynesian" is in the title.] Here’s the idea. In his earlier work Roger had studied a type of macroeconomic indeterminacy that is very different from the multiple equilibrium models most of us are used to. In search and matching models we typically have to deal with situations in which two economic agents have to divide the surplus from exchange. There is abundant theory to bring to bear here - generalized Nash bargaining, Kalai bargaining, Rubinstein bargaining, etc. - but if we're to be honest with ourselves, we have to admit that we really don't know much about how people will divide the surplus in exchange. That idea has been exploited in monetary theory - for example by Hu, Kennan, and Wallace. Once we accept the idea that there is indeterminacy in how the surplus from exchange is split, we can think about artificial worlds with multiple equilibria. In my paper, I first showed a simple version of Roger's idea. Output is produced by workers and producers, and there is a population of people who can choose to be either, but not both. Each individual in this world chooses an occupation (worker or producer), they go through a matching process where workers are matched with producers (there's a matching function). Some get matched, some do not, and when there is a match output gets produced and the worker and producer split the proceeds and consume. In equilibrium there are always some unmatched workers (unemployment) and unmatched producers (unfilled vacancies). There is a continuum of equilibria indexed by the wage in a match. A high wage is associated with a high unemployment rate. That's because, in equilibrium, everyone has to be indifferent between becoming a producer and becoming a worker. If the wage is high, an individual receives high surplus as a worker and low surplus as a producer. Therefore, it must be easier in equilibrium to find a match as a producer than as a worker - the unemployment rate must be high and the vacancy rate low.

What I did was to extend the idea by working this out in a monetary economy - for me, a Lagos-Wright economy where money was necessary to purchase goods. Then, I could think about monetary (and fiscal) policy, and how policymakers could achieve optimality. As in the indeterminacy literature, this required thinking about how policy rules could kill off bad equilibria.

On to Roger's new paper. He also wants to flesh out his ideas in a monetary economy, and there's a lot in there, including quantitative work. As in Roger's previous work, and my interpretation of it, there are multiple steady states, with high wage/high unemployment steady states. As it's a monetary economy (overlapping generations), there are also multiple dynamic equilibria, and Roger explores that. So, that all seems interesting. But I'm having trouble with two things. The first is Roger's "belief function." In Roger's words:
To close our model, we assume that equilibrium is selected by ‘animal spirits’ and we model that idea by introducing a belief function as in Farmer (1993, 2002, 2012b). We treat the belief function as a fundamental with the same methodological status as preferences and endowments and we study the implications of that assumption for the ability of monetary policy to influence inflation, output and unemployment.
So, a lot of people have done work on indeterminacy, and I have never run across a "belief function," that someone wants me to think is going to deliver beliefs exogenously. In Roger's model, the belief function is actually an equilibrium selection device, imposed by the modeler. The model tells us there are multiple equilibria, and that's all it has to say. "Beliefs" as we typically understand them, are in fact endogenous in Roger's model. And calling them exogenous does not accomplish anything, as far as I can tell, other than to get people confused, or cause them to raise objections, as I'm doing now.

Second complaint: This goes back to my lengthy discussion above. Roger's paper has "animal spirits" in the title, it cites the General Theory, and the words "aggregate demand" show up 7 times in the paper. Roger also sometimes comes up with passages like this:
Our model provides a microfoundation for the textbook Keynesian cross, in which the equilibrium level of output is determined by aggregate demand. Our labor market structure explains why firms are willing to produce any quantity of goods demanded, and our assumption that beliefs are fundamental determines aggregate demand.
And this:
Although our work is superficially similar to the IS-LM model and its modern New Keynesian variants; there are significant differences. By grounding the aggregate supply function in the theory of search and, more importantly, by dropping the Nash bargaining assumption, we arrive at a theory where preferences, technology and endowments are not sufficient to uniquely select an equilibrium.
In how many ways are these silly statements? This model is related to the Keynesian Cross and IS-LM as chickens are related to bears. The genesis of Roger's framework is Paul Samuelson's overlapping generations model, work on indeterminacy in monetary versions of that model (some of which you can find in the Minneapolis conference volume), and the search and matching literature. NK models are not "variants" of IS-LM models - they are entirely different beasts. It's not "aggregate demand" that is determining anything in Roger's model - there are multiple equilibria, and that's all.

Maybe you think this is all harmless, but it gets in the way of understanding, and I think Roger's goal is to be understood. Describe a bear as if it's a chicken, and you're going to confuse and mislead people. And they may make bad policy decisions as a result. Better to get in our faces with your ideas, and bear the consequences.

Friday, June 17, 2016

Dazed and Confused?

In October 2015, after a September payroll employment estimate of 142,000 new jobs, described as "grim" and "dismal" in the media, I wrote this blog post, arguing that we might well see less employment growth in the future. That conclusion came from simple labor force arithmetic. With the working-age population (ages 15-64) growing at a low rate of about 0.5%, if the labor force participation rate failed to increase and the unemployment rate stopped falling, payroll employment could grow at most by 60,000 per month, as I saw it last October.

After the last employment report, which included an estimate of a monthly increase of 38,000 in payroll employment, some people were "shocked," apparently. Let's take a look at a wider array of labor market data, and see whether they should be panicking.

If you have been following employment reports in the United States for a while, you might wonder why the establishment survey numbers are always reported in terms of the monthly change in seasonally-adjusted employment. After all, we typically like to report inflation as year-over-year percentage changes in the price level, or real GDP as quarterly percentage changes in a number that has been converted to an annual rate. So, suppose we look at year-over-year percentage changes in payroll employment:
That wouldn't quite make your cat climb the curtains. Employment growth rates were above 2% for a short time in early 2015, and the growth rate has fallen, but we're back to growth rates close to what we saw in 2013-2014.

What's happening with unemployment and vacancies?
The unemployment rate is currently at 4.7%, only 0.3 percentage points higher than its most recent cyclical low of 4.4% in May 2007, and the vacancy rate (JOLTS job openings rate) has been no higher since JOLTS came into being more than 15 years ago. Thus, by the standard measure we would use in labor search models (ratio of vacancies to unemployment), this job market is very tight.

If we break down the unemployment rate by duration of unemployment, we get more information:
In this chart, I've taken the number of unemployed for a particular duration, and expressed this as percentage of the labor force. If you add the four quantities, you get the total unemployment rate. Here, it's useful again to compare the May 2016 numbers with May 2007. In May 2007, the unemployment rates for less than 5 weeks, 5 to 14 weeks, 15-26 weeks, and 27 weeks and over were 1.6%, 1.4%, 0.7%, and 0.7%, respectively. In May 2016 they were 1.4%, 1.4%, 0.7%, and 1.2%, respectively. So, middle-duration unemployment currently looks the same as in May 2007, but there are fewer very-short-term unemployed, and more long-term unemployed. But long-term unemployment continues to fall, with a significant decline in the last report.

Some people have looked at the low employment/population ratio and falling participation rate, and argued that this reflects a persistent inefficiency:
So, for example, if you thought that a large number of "involuntarily" unemployed had dropped out of the labor force and were only waiting for the right job openings to materialize, you might have thought that increases in labor force participation earlier this year were consistent with such a phenomenon. But the best description of the data now seems to be that labor force participation leveled off as of mid-2015. Given the behavior of unemployment and vacancies in the previous two charts, and the fact that labor force participation has not been cyclically sensitive historically, the drop in labor force participation appears to be a secular phenomenon, and it is highly unlikely that this process will reverse itself. Thus, it seems wrongheaded to argue that some persistent wage and price stickiness is responsible for the low employment/population ratio and low participation rate. There is something to explain in the last chart alright (for example, Canada and Great Britain, with similar demographics, have not experienced the same decline in labor force participation), and this may have some connection to policies in the fiscal realm, but it's hard to make the case that there is some alternative monetary policy that can make labor force participation go up.

Another key piece of labor market information comes from the CPS measures of flows among the three labor force states - employed (E), unemployed (U), and not in the labor force (N). We'll plot these as percentage rates, relative to the stock of people in the source state. For the E state:
The rate of transition from E to U is at close to its lowest value since 1990, but the transition rate from E to N is relatively high. This is consistent with the view that the decline in labor force participation is a long-run phenomenon. People are not leaving E, suffering a period of U, and then going to N - they're going directly from E to N. Next, the U state:
In this chart, the total rate at which people are exiting the U state is lower than average and, while before the last recession the exit rate to E was higher than the exit rate to N, these rates are currently about the same. This seems consistent with the fact that the unemployment pool currently has a mix that tilts more toward long-term unemployed. These people have a higher probability than the rest of the unemployed, of going to state N rather than E. Finally, for state N:
Here, the rates at which people are leaving state N for both states E and U are relatively low. Thus, labor force participation has declined both because of a high inflow (from both E and U) and a low outflow. But, the low outflow rate to U from N (in fact, the lowest since 1990) also reflects the tight labor market, in that a person leaving state N is much more likely to end up in state E rather than U (though no more likely, apparently, than was the case historically, on average).

The last thing we should look at is productivity. In this context, a useful measure is the ratio of real GDP to payroll employment, which looks like this:
By this measure, average labor productivity took a large jump during 2009, but since early 2010 it has been roughly flat. There has been some discussion as to whether productivity growth measures are biased downward. Chad Syverson, for example, argues that there is no evidence of bias in measures of output per hour worked. So, if we take the productivity growth measures at face value, this is indeed something to be shocked and concerned about.


1. The recent month's slowdown in payroll employment growth should not be taken as a sign of an upcoming recession. The labor market, by conventional measures, is very tight.
2. The best forecast seems to be that, barring some unanticipated aggregate shock, labor force participation will stay where it is for the next year, while the unemployment rate could move lower, to the 4.2%-4.5% range, given that the fraction of long-term unemployed in the unemployment pool is still relatively high.
3. Given an annual growth rate of about 0.5% in the working age population, and supposing a drop of 0.2-0.5 percentage points in the unemployment rate over the next year, with half the reduction in unemployment involving transitions to employment, payroll employment can only grow at about 80,000 per month over the next year, assuming a stable labor force participation rate. Thus, if we add the striking Verizon workers (about 35,000) to the current increase in payroll employment, that's about what we'll be seeing for the next year. Don't be shocked and concerned. It is what it is.
4. Given recent productivity growth, and the prospects for employment growth, output growth is going to be low. I'll say 1.0%-2.0%. And that's if nothing extraordinary happens.
5. Though we can expect poor performance - low output and employment growth - relative to post-WWII time series for the United States, there is nothing currently in sight that represents an inefficiency that monetary policy could correct. That is, we should expect the labor market to remain tight, by conventional measures.

Tuesday, June 14, 2016

Dave Backus

Dave Backus has passed away. Dave was the Heinz Riehl Professor in the Stern School at NYU, and had previous positions at Queen's University, UBC, and the Minneapolis Fed. Dave leaves behind a solid body of work in macroeconomics, and many sad colleagues, students, friends, and family. Dave and I crossed paths in Kingston Ontario, Minneapolis, and on the editorial board of the JME. He was always straightforward, helpful, a dedicated scientist, and one of our honourary Canadians. Dave is interviewed here.

Thursday, April 14, 2016

Neo-Fisherian Denial

Accepting neo-Fisherism is a 12-stage program. The first stage is admitting you have a problem. The twelfth stage is helping others to admit that they have a problem too. Going from stage one to stage twelve may be a tough battle - many could temporarily fall off the wagon. But take it one day at a time. Most people, for example Larry Summers, are still at stage one. In this video, about two minutes in, after the jokes, Summers says that neo-Fisherism is most likely to be remembered as a confusion. So, if the problem is only confusion, I would like to help him out.

Neo-Fisherism says, basically: "Excuse me, but I think you have the sign wrong." Conventional central banking wisdom says that increasing interest rates reduces inflation. Neo-Fisherites say that increasing interest rates increases inflation. Further, it's not like this is some radical, novel theory. Indeed, a cornerstone of Neo-Fisherism is:

Neo-Fisherian Folk Theorem: Every mainstream macroeconomic monetary model has neo-Fisherian properties.

Let me illustrate that. A nice, simple, version of the standard New Keynesian (NK) model is the one in Narayana Kocherlakota's slides from this conference put on by the Becker Friedman Institute. I'll use my own notation. NK's version of the NK model is a reduced form, with two equations. The first comes from a pricing equation for a nominal bond - what's often called the "NK IS curve," or
Here, y is the output gap, the difference between actual output and what is efficient, pi is the inflation rate, R is the nominal interest rate, r is the subjective rate of time preference, and a is the coefficient of relative risk aversion. The second equation is
That's just a Phillips curve, with b >0 determined by the degree of price stickiness. In the underlying model, some fraction of firms is constrained to set prices to the average price from last period. Thus, there's no expectations term in the Phillips curve, as there's no forward-looking pricing. That makes the model easy to solve.

So, substitute for y in equation (1) using the Phillips curve equation, to get
So, you can see why people think this type of model is a foundation for conventional central banking ideas. If inflation expectations are "anchored," which I guess means exogenous, on the right-hand side of the equation, then an increase in the current nominal interest rate would have to imply that the current inflation rate goes down. Indeed, if the central banker experiments, by choosing the nominal interest rate each period at random, then he or she will observe a negative correlation between inflation and nominal interest rates, which would tend to confirm conventional beliefs.

But consider the following. Suppose we look at the deterministic version of the model, and use (3) to solve for a first-order difference equation in the inflation rate:
Then, an equilibrium is a sequence of inflation rates solving (4), and we can solve for output from (2). As is typical of monetary models, there's no initial condition to tie things down, so there are potentially many equilibria. We can say, however, that in a steady state, from (1),
And then (2) gives
So, what "anchors" inflation and inflation expectations in the long run is the long run nominal interest rate. And then the Phillips curve determines output. That's the first Neo-Fisherian property of this standard model.

Next, from the difference equation, (4), if the nominal interest rate is a constant R forever, then there is a continuum of equilibria, indexed by the initial inflation rate, and they all converge to a unique steady state, which is given by (6) and (7). To see this, start with any initial pi, and solve (4) forward. So, we know that the long run is Fisherian. But what about the short run?

We'll consider the transition to a higher nominal interest rate. In the figure, the nominal interest rate is constant until period T, and then it increases permanently, forever. In the figure, D1 is the difference equation (4) with a lower nominal interest rate; D2 is (4) with a higher nominal interest rate. We'll suppose that everyone perfectly anticipates the interest rate increase from the beginning of time. Again, there are many equilibria, and they all ultimately converge to point B, but every equilibrium has the property that, given the initial condition, inflation will be higher at every date than it otherwise would have been without the increase in the nominal interest rate. A straightforward case is the one where the equilibrium is at A until period T, in which case the inflation rate increases monotonically, as shown, to a higher steady state inflation rate. Inflation never goes down in response to a permanent increase in the nominal interest rate. That's consistent with what John Cochrane finds in a related model.

So, that's the second Neo-Fisherian property, embedded in this NK model. The NK model actually doesn't conform to conventional central banking beliefs about how monetary policy works. What's going on? From equation (1), an increase in the current nominal interest rate will increase the real interest rate, everything else held constant. This implies that future consumption (output) must be higher than current consumption, for consumers to be happy with their consumption profile given the higher nominal interest rate. But, it turns out that this is achieved not through a reduction in current output and consumption, but through an increase in future output and consumption. This serves, through the Phillips curve mechanism, to increase future inflation relative to current inflation. Then, along the path to the new steady state, output and inflation increase. But, if you read Narayana's Bloomberg post from five days ago, you would have noted that he thinks that lowering the nominal interest rate raises inflation and output:
Monetary policy makers should be seeking to ease, not tighten. Instead of satisfying a phantom need to “normalize” rates, the Fed should do what’s needed to get employment and inflation back to normal.
Apparently he's thinking about some other model, as the one he constructed tells us the opposite.

For more depth on this, you should read this paper by Peter Rupert and Roman Sustek. Here's their abstract:
The monetary transmission mechanism in New-Keynesian models is put to scrutiny, focusing on the role of capital. We demonstrate that, contrary to a widely held view, the transmission mechanism does not operate through a real interest rate channel. Instead, as a first pass, inflation is determined by Fisherian principles, through current and expected future
monetary policy shocks, while output is then pinned down by the New-Keynesian Phillips curve. The real rate largely only reflects consumption smoothing. In fact, declines in output and inflation are consistent with a decline, increase, or no change in the ex-ante real rate.

Conventional central banking wisdom is embedded in Taylor rules. For simplicity, suppose the central banker just cares about inflation, and follows the rule
Here pi* is the central bank's inflation target. Under the Taylor principle, d > 1, i.e. the central bank controls inflation by moving interest rates up when inflation goes up - and the nominal interest rate adjustment is more than one-for-one. It's well known from the work of Benhabib et el. that Taylor rules have "perils," and this model can illustrate that nicely. The difference equation determining the path for the inflation rate becomes
In the next figure, A is the intended steady state in which the central bank achieves its inflation target, and that is one equilibrium. But there are many equilibria for which the initial inflation rate is greater than -r and smaller than the inflation target, and all of these equilibria (like the one depicted) converge to the zero lower bound (ZLB), where the central banker gets stuck, with an inflation rate permanently lower than the target. Potentially, there could be equilibria with an initial inflation rate higher than the inflation target, which have the property that inflation increases forever. But in this model, that also implies that output increases without bound, which presumably is not feasible.

Rules with -1 < d < 1 all have the property that there are multiple equilibria, but these equilibria all converge to the inflation target - there's a unique steady state in those cases. Note that the Taylor rule central banker is Neo-Fisherian if d < 0, and that this can be OK in some sense. But aggressive neo-Fisherism, i.e. d < -1 -2(a/b), is bad, as this implies that the inflation rate cycles forever without hitting the inflation target.

But if the central banker actually wants to consistently hit the inflation target, there are better things to do than (8). For example, consider this rule:
Plug that into (4), and you'll get
And so, (10) implies that
So, under that forward-looking Taylor rule, the central bank always hits its target, and in equilibrium the central bank is purely Fisherian. If it wants to increase its inflation target - and actual inflation - it just increases the nominal interest rate one-for-one with the increase in the inflation target. So, I've lost count now, but I think that's Neo-Fisherian property 3 [see the addendum below. There's a glitch that needs to be fixed in the rule (10) to account for the ZLB.]

The rule (10) specifies out-of-equilibrium behavior that kills all of the equilibria except the desired steady state. Why does this work? If the central banker sees incipient inflation in the future, he or she knows that this will tend to increase current output, increase current inflation, and increase future output, which will also increase current inflation. To nullify these effects, the central banker commits to offset this completely, if it happens, with an increase in the nominal interest rate. In equilibrium the central banker never has to carry out the threat. Maybe you think that's not plausible, but that's the nature of the model. NK adherents typically emphasize forward guidance, and that's not going to work without commitment to future actions.

Some people (e.g. Garcia-Schmidt and Woodford) have argued that Neo-Fisherian results go out the window in NK models under learning rules. As was shown above, these models are always fundamentally Fisherian in that any monetary policy rule has to somehow adhere to Fisherian logic on average - basically the long-run nominal interest rate is the inflation anchor. But there can also be learning rules that give very Fisherian results. For example, suppose that the economic agents in this world anticipated that next period's inflation is what they are seeing this period, that is
Plug that into equation (1), and we get
So, for this learning rule, inflation is determined period-by-period by the nominal interest rate - this is about as Fisherian as you can get.

Thus, if conventional central bankers are basing their ideas on some model, it can't be a mainstream NK model, since increasing the nominal interest rate makes inflation go up in mainstream NK models. But don't get the idea that it's some other mainstream model they're thinking about. As the Neo-Fisherian Folk Theorem says, all the mainstream models have these properties, though some of the other implications of those models differ. For example, it's easy to show that one can get exactly the same dynamics from Alvarez, Lucas and Weber's segmented markets model. That's a model with limited participation in asset markets and a non-neutrality of money that comes from a distribution effect. Everyone in the model has fixed endowments forever, and they buy goods subject to cash-in-advance. The central bank intervenes through open market operations, but the people on the receiving end of the initial open market operation are only the financial market participants. The model was set up to deliver a liquidity effect, i.e. if money growth goes up, this increases the consumption of market participants (and decreases everyone elses's consumption), and this will reduce the real interest rate. Thus, you might think (like the NK model) that this produces the result that, if the central bank increases the nominal interest rate, then inflation will go down.

But, the inflation dynamics in the Alvarez et al. segmented markets model are identical to what we worked out above. In fact, the model yields a difference equation that is identical to equation (4), though the coefficients have a different interpretation. Basically, what matters is the degree of market participation, not the degree of price stickiness - it's just a different friction. And all the other results are exactly the same. But the mechanism at work is different. The quantity theory of money holds in the segmented markets model, so what happens when the nominal interest goes up is that the central bank has to choose a path for open market operations to support that. This has to be a path for which the inflation rate is increasing over time, but at a decreasing rate. This will imply that consumption grows over time at a decreasing rate, so that the liquidity effect (a negative real interest rate effect) declines over time, and the Fisher effect increases.

So, once you get it, you can form your own Neo-Fisherian support group. Moving from denial to advocacy is important.

Addendum1: Thanks to Narayana. This took some work, but this is a Taylor rule that assures that the central banker hits the inflation target period-by-period, implying that the nominal interest rate is constant in equilibrium, and will move one-for-one with the inflation target. If future inflation is anticipated to be sufficiently high, then the central banker follows the forward looking rule (10):
This rule offsets incipient high inflation, and assures that the central bank hits the inflation target. But, low inflation is a problem for (16), as the ZLB gets in the way. So, if there is incipient low inflation, the central banker follows the rule:
And the critical value for future inflation is
How does (17) work? Any equilibrium has to satisfy (4), but (4) and (17) imply
So future inflation must be greater than the inflation target. But (17) says that the central banker chooses this rule only when future inflation is less than pi**, which is less than the inflation target. So this can't be an equilibrium. I like (17), as the central banker is Neo-Fisherian - he or she kills off low inflation with a high nominal interest rate.

Addendum 2: This is interesting too. Suppose the policy rule is
Then there is a critical value for the initial inflation rate,
such that, if the initial inflation rate is below this critical value, then the inflation rate goes to the inflation target in the next period and stays there. If the initial inflation rate is above the critical value, then the initial nominal interest rate is zero, and the inflation rate falls to the inflation target, and stays at the target forever. So, that's a Fisherian rule that has nice properties.

Addendum 3: Here's another one. Central bank follows rule (20) if current inflation is below the inflation target. Central bank follows rule (10) if current inflation is at or above the inflation target. With inflation below the target, this implies raising the nominal interest rate to get inflation to target. With inflation at or above the target, the central bank promises to raise the nominal interest rate in response to incipient inflation. At worst, this implies one period of inflation below target in equilibrium.

Thursday, April 7, 2016

Fiscal Theory of the Price Level, Helicopters, and Central Bank Balance Sheets

Last week, I attended a conference on the fiscal theory of the price level (FTPL) in Chicago. Eric Leeper claims that I'm actually a closet FTPL person, and seems to have thought I belonged there, which is certainly fine with me. The assignment was to talk about research ideas. Some people had papers, and some (like me) didn't. My slides are posted here.

Here's the idea. The FTPL came out of research done by Eric Leeper, Mike Woodford, Chris Sims, and John Cochrane, among others, beginning in the early 1990s, so this stuff has been around for quite a while. Indeed, there are precedents in the work of Sargent and Wallace, and Aiyagari and Gertler in the 1980s, for example. Sometimes FTPL practitioners seem to be shooting for an alternative quantity theory. Under the quantity theory of money - Old Monetarism basically - we were supposed to think that the demand for money was a stable function of some small set of observable economic variables, so that the supply of money by the central bank would determine the price level and inflation. Under the FTPL it's the quantity of government debt (or in some versions the quantity of consolidated government debt - including the central bank's liabilities) that's important, and it's also important that the counterpart of "demand" for this debt need not be stable. The FTPL starts with the consolidated government's intertemporal budget constraint and, typically, writes it (after some manipulation) with the real quantity of government debt outstanding on the left-hand side (nominal debt divided by the price level), and the expected discounted value of government surpluses on the right-hand side. Therefore, if the stuff on the right-hand side of this equation is given, the nominal quantity of government debt determines the price level. Alternatively, the expected discounted value of future government surpluses is the analog of the demand for money in the quantity theory of money, so reductions in the future government promises backing the government's debt will reduce the demand for government debt and its current value - increase the price level - given the supply of government debt in nominal terms.

John Cochrane provides some intuition in terms conventional asset pricing. That is, think of the expected discounted future government surpluses as analogous to the payoffs on any asset, and the real value of government debt as the value of the asset, and it all makes sense. That's not even an analogy - the intertermporal consolidated government budget constraint can literally be rewritten as an asset pricing equation.

OK, so where does this theory go then? Sometimes the FTPL people got sidetracked with issues such as whether the consolidated government budget constraint is a constraint or an equilibrium relationship, whether the government is similar to, or different from, a private household, in terms of its budget constraint, etc. Some of that discussion was unproductive for this research program, I think. Also, one might get the idea from this literature that central banks cannot fundamentally be independent, and that the fiscal authority is always in the inflation driver's seat, which I don't think is the right way to think about the fiscal-monetary interaction. But, the fiscal-monetary interaction is the message of the theory, and that's very interesting. For example, central banks have recently been engaged in quantitative easing policies, which sometimes look like conventional fiscal debt-management. That might be viewed as central banking jumping into the fiscal driver's seat.

So, what's in my slides? There are three parts to this: (i) a model with minimal government; (ii) a model with open market operations; (iii) a non-Ricardian model with a government debt shortage. The models are very simple, with no uncertainty. The minimal government (MG) model and open market operations (OMO) models are simple cash-in-advance setups with fixed endowments - output and consumption are fixed, and we're only going to be concerned with determining inflation and the price level. The non-Ricardian (NR) model has production.

Start with the MG model, and consider this a thought experiment. The basic idea is to show that we can set up a central bank with no connection to fiscal policy, and this central bank will have no problem determining the price level and inflation. There are households in this economy, and they have fixed endowments each period, but can't consume their own goods and can only trade subject to cash-in-advance - they need currency to buy goods. There is a role for the government, but it's minimal, i.e. the government grants a monopoly to a central bank to issue currency, and I'm supposing the government can costlessly enforce the monopoly. The government also issues shares in the central bank to the households, and constrains the central bank to turn over its profits, period-by-period, to its shareholders. The central bank can issue currency and reserves as liabilities, and uses the liabilities to finance lending to the households. Reserves cannot be used in retail transactions - purchases of goods - and they bear interest, otherwise people would not hold them. Reserves are convertible into currency, one-for-one, and vice-versa. I've assumed away banks, so reserves are just debt instruments of the central bank that anyone can hold.

The MG central banking structure has something in common with what was envisioned by the framers of the 1913 Federal Reserve Act, or with how the European Central Bank works. That is, money is injected through central bank lending rather than open market operations. We could add details like private banks and collateralized lending, but those things don't matter for the general ideas here.

What does the central bank do in the MG model? The model is dynamic, but think in terms of one-time policy decisions that give a stationary equilibrium - a constant inflation rate, and a constant quantity of reserves, in real terms. The central bank fixes the nominal interest rate it charges on its loans at a constant R forever. This does two things. First, it determines the spread the central bank earns on lending financed with currency issue, though the central bank makes zero profits intermediating loans by issuing reserves, as the interest rate on reserves is R in equilibrium. Second, through standard asset pricing, R determines the inflation rate - that's just Irving Fisher. This is an economy in which the real rate is a constant (we'll relax this later). Finally, the the central bank sets the nominal path for its profits, and the nominal path for its total liabilities. And that does it. This determines the initial price level, the inflation rate, and how the stock of central bank liabilities is split between reserves and currency.

Then, in the MG equilibrium, increasing R increases the inflation rate one-for-one, and the central bank can produce as much inflation as it wants. Holding all the other elements of central bank policy constant, a level increase in the stock of nominal outside money is irrelevant for prices and inflation. This just increases the quantity of reserves. That's a liquidity trap result, but you get the liquidity trap no matter what R is. Further, the growth rate in total outside money is disconnected from inflation. While the nominal stock of currency grows at the inflation rate in equilibrium, the total stock of central bank liabilities need not.

The key thing here is that the central bank determines prices and inflation without any fiscal support. If the idea you got from the FTPL is that fiscal policy is necessary to determine the price level and inflation, that's not correct.

Next, go to the OMO model in which the central bank buys and sells government debt, and there is a fiscal authority that can tax households lump sum. Otherwise the model is the same as MG, except now the central bank's profits are turned over to the fiscal authority. Here, we'll suppose that the fiscal authority determines on its own the real transfers over time that are required to support the government debt. At the first date, the fiscal authority issues debt, some of which the central bank purchases by issuing outside money (reserves and currency), and the fiscal authority then rebates the proceeds of the debt issue to households. Then, the fiscal authority levies future taxes to pay the interest on the government debt, which will be constant in equilibrium, so we can think about what is going on. This economy is Ricardian, so the present value of the fiscal authority's transfers is zero. But as in the MG economy, transfers with a positive present value are generated from the central bank's activities. Those transfers are determined by R, and we'll assume that fiscal policy is constant (government debt held constant in real terms) and does not depend on R.

In the OMO economy, monetary policy works much as in the MG economy. Inflation is determined in a Fisherian fashion, and the central bank can have a large balance sheet, but if there are positive reserve holdings forever, having more outside money in this economy has no effect. Given R, the extra money is held as reserves. Further, "helicopter drops" cannot produce more inflation. Given all the other features of policy, if the fiscal authority increases transfers - in real terms, say - then in this Ricardian economy that has no effect. Further, there will be no effect on prices if the central bank purchases the extra debt issued with outside money. The money will just be held as reserves - it's irrelevant whether the increase in transfers is financed with reserves or government debt. Indeed, the central bank could issue currency to finance the transfers, and this will just be converted into reserves and held that way - nothing happens.

In terms of the FTPL, the point here is that FTPL results are derived simply from assumptions that imply that the fiscal authority is in the inflation driver's seat. Here, I've just made natural assumptions about central bank independence and, again, the central bank determines the price level and can have as much inflation as it wants.

Now that we've got those basic ideas nailed down, we can get more sophisticated and think about an economy - the NR economy - with exchange involving secured credit and currency. This works a bit like a cash goods/credit goods model. Here government debt serves as collateral in credit transactions. If the collateral constraint binds, this implies that government debt carries a liquidity premium, and the real interest rate will be low. Then the economy is non-Ricardian. More government debt will relax the collateral constraint and improve efficiency, but we'll assume that the fiscal authority behaves suboptimally, and the central bank responds to that.

So, what happens?

1. If the collateral constraint binds, this implies the central bank should set R > 0 at the optimum. The friction that makes the real interest rate low implies that the central bank should not be at the zero lower bound.
2. Given R, expansion in the central bank's balance sheet is again neutral - swapping reserves for government bonds does not matter, provided these two assets serve equally well as collateral.
3. A policy of increasing transfers financed with government debt, with a permanent expansion in government debt, is beneficial policy, as this relaxes the collateral constraint. But it doesn't matter if this is financed by an increase in outside money (a helicopter drop). If so, the extra money is held as reserves. Further, this action doesn't increase inflation - it reduces inflation. If the central bank wants to increase inflation, it has to raise R. Neo-Fisher again.
4. If reserves are worse collateral than government debt (true in practice, basically, if we think of collateral as, in part, supporting bank liabilities) then a balance sheet expansion by the central bank is bad - it just tightens collateral constraints. This increases inflation alright, but there's a welfare loss.

So, the conclusions are:

1. FTPL forces us to think seriously about fiscal/monetary interaction, and that's very important. But fiscal support is not necessary for monetary policy to work, nor is it useful to think of fiscal policy determining inflation on its own - the central bank can indeed be independent.
2. Fiscal/monetary interaction becomes really important when we start thinking about the liquidity properties of government debt.
3. Helicopter drops? Forget it. This is not some cure-all for a low-inflation problem.
4. QE can be harmful, as it soaks up useful collateral and replaces it with inferior assets.
5. Neo-Fisherian denial is not good for you. Central banks that want to increase inflation need to increase nominal interest rates.

Friday, March 25, 2016

Central Bank Forecasts: What's in a Dot?

There has been some discussion of central bank forecasts and policy projections, including some blog posts by Tony Yates, Tony Yates part II, Narayana, David Andolfatto, and an editorial on Bloomberg.

The FOMC's dot plots are part of the economic projection materials published four times per year after the March, June, September, and December FOMC meetings. Many central banks in the world publish forecasts. For example, several times a year, the Bank of England publishes detailed forecasts in its Inflation Report. As far as I can tell, the Bank does not offer a projection of its policy rate, though it reports a market-based forecast of the policy rate. The Swedish Riksbank publishes forecasts, and also prominently displays a projection of its policy rate at the top of its home page, as a fan chart. The Bank of Canada offers inflation projections, but does not project its policy rate.

What's the value of a central bank's forecasts? For the most part, the central bank does not have any important information you don't have, that would be relevant for a macroeconomic forecast. Nor does the central bank possess any special knowledge about how to conduct macroeconomic forecasts. Basically, any professional forecasting firm should be able to do it as well or better. So, we're not interested in a central bank's forecasts because these are good forecasts. But perhaps we care about the central bank's forecasts because this tells us something about what the central bank will do. For example, the central bank could be pessimistic, and wrong, but I pay attention because monetary policy matters for my decisions. I'm better off if I know about the pessimistic central bank forecast than if I did not know.

There are aspects of central bank forecasting that are very different from private forecasting, however. For example, the Bank of England, the Swedish Riksbank, and the Bank of Canada all target inflation at 2%, and they provide forecasts of inflation, which is the thing they are trying to control. Thus, implicit in the central bank's forecast is a policy exercise. The ultimate forecast is conditioned on a particular path for policy instruments, and the process by which that policy path was chosen involved alternative policy simulations - which would produce different forecasts. If monetary policy really matters to me, I would want to know a lot about that process. Indeed, I would like to know the path for policy instruments that underlies the forecast, the whole structure of the model that was used to generate the forecasts, and the add factors that were applied to the model to produce the forecast (trust me, the add factors are really important). But most central banks are too secretive to give me all that stuff (that's "me" as if I were you).

So what about the dot plots? In principle, this provides some of the information that people affected in important ways by monetary policy are looking for. Narayana gives a good description here of how the dot plots are constructed. Each dot represents what an individual FOMC member thinks the optimal policy rate would be at the end of each future calendar year, given his or her forecast of other macroeconomic variables. That's important. This is not an individual's forecast of what the FOMC will actually do, it's what the individual thinks he or she would do in the future if the world evolves in the way he or she thinks it will, and if he or she has ultimate decision-making power. Of course there's a lot the dot plots don't tell you. Which dot is who? Maybe that dot doesn't get to vote this year? What's the forecast of other variables associated with each dot? What's the model (if any) that was used to evaluate policy? It would be nice to know which dots are associated with who, so that I could at least know who to ask which questions.

Let's look at some dot plot examples (all from the Board's web site). Here's one from January 2012:
So, in January 2012, of 17 FOMC members, 3 think liftoff should happen by the end of 2012, 6 by the end of 2013, and 11 by the end of 2014. And in the long run, they're collectively thinking that the policy rate will be above 4%. So, what actually happened (liftoff in December 2015) appears delayed relative to that projection. But so what? Maybe the economy evolved in ways that these FOMC participants did not anticipate? Let's look at another one. This is for March 2014:
So you can see, comparing this chart to the last, that the committee's views have changed in two years' time. In 2012, they thought they would be lifting off by the end of 2014, but in March 2014 all but one are convinced that liftoff by December 2014 is off the table. For 2014 and 2015, the March 2014 projection is consistent with what actually happened - no liftoff in 2014, and liftoff by December 2015 (just barely). But, in March 2014, FOMC participants were predicting a policy rate that, on average, was above 2% by the end of 2016. That appears to be unlikely now.

Finally, this is the dot plot for September 2015:
This shows how liberally the projection exercise can be interpreted by the participants. Note the outlier - one participant thought it would be optimal to have a negative policy rate, at least until the end of 2016. As Janet Yellen pointed out in Congressional testimony in February, she is not entirely clear that negative interest rates on reserves are even feasible in the United States, given both the legalities and our institutional structure. So, if one were to say, in September 2015, that negative interest rates would be optimal in December of 2015, and in December of 2016, it's not clear what that means, as the feasibility of such a policy still appears unsettled.

Some people are worried that the dot plots might be interpreted as commitments. If they were interpreted this way, that would be bad. The September 2015 dot plot above, interpreted as a commitment, says the FOMC was committing in September 2015 to roughly five quarter-point rate hikes by the end of 2016. If so, we would say they were failing. But that's not the right interpretation. What we should be doing is asking what has happened since September 2016 to change FOMC participants' views, how those views have changed, and whether that makes any sense. And the dot plots help you make that assessment, though maybe they don't tell you everything you want to know.

The Bloomberg editorial suggests the dot plots should go:
...it would help more to stop releasing information that begs to be misunderstood as a commitment to a specific path for interest rates, when the Fed is making no such commitment.
By this logic, I think, saying anything at all means you are "begging to be misunderstood." By now, I think the dot plots have helped people understand what the FOMC's policy statements mean. For example, the information in fed funds futures has typically predicted a lower policy rate trajectory for some time than what is in the dot plots - and typically the market has been right.

Narayana has some other suggestions about forecasts. From the Bloomberg editorial:
...Narayana Kocherlakota offered two other suggestions. First, delay publication of the dot plot to coincide with release of the Fed minutes: That way, it would be seen in the context of the Fed's internal debate on policy, rather than as part of its collective judgment on interest rates. Second, release a collective medium-term forecast of output and employment, modeled on the Bank of England's so-called fan charts.
The first suggestion would seem to make us worse off. This delays useful information, which is costly, and there is not much benefit to be had. The information in the minutes is only an outline of the FOMC discussion, and there is little to connect with information in the dot plots - hard to connect the dots, basically, even given the minutes. Second, a "collective medium-term forecast..." by all FOMC participants is not feasible, given the decentralized structure of the Federal Reserve System. So much for that.