Regional President Speech

Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Discussion of Evans and Honkapohja, “Robust Learning Stability.” JamesBullard PresidentandCEO FederalReserveBankofSt. Louis1 28May2008 FrontiersinMonetaryTheoryandPolicy—IMES,BOJ 1 ViewsexpressedarethoseoftheauthoranddonotnecessarilyreflectofficialpositionsoftheFOMCorthe FederalReserveSystem. ... solongassmallexpectationaldeviationsfromRE (cid:15) dissipate,insteadofaccumulating. Rationalexpectationsequilibriumisattheheartofthe (cid:15) learningliterature. Butrationalexpectationsisnotapracticalassumption. (cid:15) Actualprivatesectorexpectationsareunlikelytobe (cid:15) preciselyconsistentwithREE. Thatisstillallright... (cid:15) Thatconditionisknownasexpectationalstability. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Learning and monetary policy Rationalexpectationsisacornerstoneofmodern (cid:15) macroeconomictheory. ... solongassmallexpectationaldeviationsfromRE (cid:15) dissipate,insteadofaccumulating. Butrationalexpectationsisnotapracticalassumption. (cid:15) Actualprivatesectorexpectationsareunlikelytobe (cid:15) preciselyconsistentwithREE. Thatisstillallright... (cid:15) Thatconditionisknownasexpectationalstability. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Learning and monetary policy Rationalexpectationsisacornerstoneofmodern (cid:15) macroeconomictheory. Rationalexpectationsequilibriumisattheheartofthe (cid:15) learningliterature. ... solongassmallexpectationaldeviationsfromRE (cid:15) dissipate,insteadofaccumulating. Actualprivatesectorexpectationsareunlikelytobe (cid:15) preciselyconsistentwithREE. Thatisstillallright... (cid:15) Thatconditionisknownasexpectationalstability. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Learning and monetary policy Rationalexpectationsisacornerstoneofmodern (cid:15) macroeconomictheory. Rationalexpectationsequilibriumisattheheartofthe (cid:15) learningliterature. Butrationalexpectationsisnotapracticalassumption. (cid:15) ... solongassmallexpectationaldeviationsfromRE (cid:15) dissipate,insteadofaccumulating. Thatisstillallright... (cid:15) Thatconditionisknownasexpectationalstability. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Learning and monetary policy Rationalexpectationsisacornerstoneofmodern (cid:15) macroeconomictheory. Rationalexpectationsequilibriumisattheheartofthe (cid:15) learningliterature. Butrationalexpectationsisnotapracticalassumption. (cid:15) Actualprivatesectorexpectationsareunlikelytobe (cid:15) preciselyconsistentwithREE. ... solongassmallexpectationaldeviationsfromRE (cid:15) dissipate,insteadofaccumulating. Thatconditionisknownasexpectationalstability. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Learning and monetary policy Rationalexpectationsisacornerstoneofmodern (cid:15) macroeconomictheory. Rationalexpectationsequilibriumisattheheartofthe (cid:15) learningliterature. Butrationalexpectationsisnotapracticalassumption. (cid:15) Actualprivatesectorexpectationsareunlikelytobe (cid:15) preciselyconsistentwithREE. Thatisstillallright... (cid:15) Thatconditionisknownasexpectationalstability. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Learning and monetary policy Rationalexpectationsisacornerstoneofmodern (cid:15) macroeconomictheory. Rationalexpectationsequilibriumisattheheartofthe (cid:15) learningliterature. Butrationalexpectationsisnotapracticalassumption. (cid:15) Actualprivatesectorexpectationsareunlikelytobe (cid:15) preciselyconsistentwithREE. Thatisstillallright... (cid:15) ... solongassmallexpectationaldeviationsfromRE (cid:15) dissipate,insteadofaccumulating. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Learning and monetary policy Rationalexpectationsisacornerstoneofmodern (cid:15) macroeconomictheory. Rationalexpectationsequilibriumisattheheartofthe (cid:15) learningliterature. Butrationalexpectationsisnotapracticalassumption. (cid:15) Actualprivatesectorexpectationsareunlikelytobe (cid:15) preciselyconsistentwithREE. Thatisstillallright... (cid:15) ... solongassmallexpectationaldeviationsfromRE (cid:15) dissipate,insteadofaccumulating. Thatconditionisknownasexpectationalstability. (cid:15) FailureoftheTaylorPrincipleisassociatedwith (cid:15) expectationalinstability. contemporaneousdataspecificationofthepolicyrule. (cid:15) decreasinggaininthelearningrule. (cid:15) InthesimplestNewKeynesianmodel,theTaylorPrinciple (cid:15) isassociatedwithE-stability. Thatresultassumes (cid:15) Comforting. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the literature has shown REEmayormaynotbeexpectationallystableinNew (cid:15) Keynesianmodels. contemporaneousdataspecificationofthepolicyrule. (cid:15) decreasinggaininthelearningrule. (cid:15) FailureoftheTaylorPrincipleisassociatedwith (cid:15) expectationalinstability. Thatresultassumes (cid:15) Comforting. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the literature has shown REEmayormaynotbeexpectationallystableinNew (cid:15) Keynesianmodels. InthesimplestNewKeynesianmodel,theTaylorPrinciple (cid:15) isassociatedwithE-stability. contemporaneousdataspecificationofthepolicyrule. (cid:15) decreasinggaininthelearningrule. (cid:15) Thatresultassumes (cid:15) Comforting. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the literature has shown REEmayormaynotbeexpectationallystableinNew (cid:15) Keynesianmodels. InthesimplestNewKeynesianmodel,theTaylorPrinciple (cid:15) isassociatedwithE-stability. FailureoftheTaylorPrincipleisassociatedwith (cid:15) expectationalinstability. contemporaneousdataspecificationofthepolicyrule. (cid:15) decreasinggaininthelearningrule. (cid:15) Comforting. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the literature has shown REEmayormaynotbeexpectationallystableinNew (cid:15) Keynesianmodels. InthesimplestNewKeynesianmodel,theTaylorPrinciple (cid:15) isassociatedwithE-stability. FailureoftheTaylorPrincipleisassociatedwith (cid:15) expectationalinstability. Thatresultassumes (cid:15) decreasinggaininthelearningrule. (cid:15) Comforting. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the literature has shown REEmayormaynotbeexpectationallystableinNew (cid:15) Keynesianmodels. InthesimplestNewKeynesianmodel,theTaylorPrinciple (cid:15) isassociatedwithE-stability. FailureoftheTaylorPrincipleisassociatedwith (cid:15) expectationalinstability. Thatresultassumes (cid:15) contemporaneousdataspecificationofthepolicyrule. (cid:15) Comforting. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the literature has shown REEmayormaynotbeexpectationallystableinNew (cid:15) Keynesianmodels. InthesimplestNewKeynesianmodel,theTaylorPrinciple (cid:15) isassociatedwithE-stability. FailureoftheTaylorPrincipleisassociatedwith (cid:15) expectationalinstability. Thatresultassumes (cid:15) contemporaneousdataspecificationofthepolicyrule. (cid:15) decreasinggaininthelearningrule. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the literature has shown REEmayormaynotbeexpectationallystableinNew (cid:15) Keynesianmodels. InthesimplestNewKeynesianmodel,theTaylorPrinciple (cid:15) isassociatedwithE-stability. FailureoftheTaylorPrincipleisassociatedwith (cid:15) expectationalinstability. Thatresultassumes (cid:15) contemporaneousdataspecificationofthepolicyrule. (cid:15) decreasinggaininthelearningrule. (cid:15) Comforting. (cid:15) Agentsaretryingtorobustlytrackthechanging (cid:15) environmentinwhichtheyoperate. Keeppolicymakerinformationinlinewithreality. (cid:15) Replacedecreasinggainwithconstantgain. (cid:15) ConcentrateonoperationalrulesinthesenseofMcCallum. (cid:15) Inparticular,contemporaneousvaluesofoutputand (cid:15) inflationarenotknownwhenpolicydecisionsaremade. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the authors do Instrumentrulesplusvariousformsof“optimal”policy. (cid:15) Keeppolicymakerinformationinlinewithreality. (cid:15) Agentsaretryingtorobustlytrackthechanging (cid:15) environmentinwhichtheyoperate. ConcentrateonoperationalrulesinthesenseofMcCallum. (cid:15) Inparticular,contemporaneousvaluesofoutputand (cid:15) inflationarenotknownwhenpolicydecisionsaremade. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the authors do Instrumentrulesplusvariousformsof“optimal”policy. (cid:15) Replacedecreasinggainwithconstantgain. (cid:15) Keeppolicymakerinformationinlinewithreality. (cid:15) ConcentrateonoperationalrulesinthesenseofMcCallum. (cid:15) Inparticular,contemporaneousvaluesofoutputand (cid:15) inflationarenotknownwhenpolicydecisionsaremade. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the authors do Instrumentrulesplusvariousformsof“optimal”policy. (cid:15) Replacedecreasinggainwithconstantgain. (cid:15) Agentsaretryingtorobustlytrackthechanging (cid:15) environmentinwhichtheyoperate. Keeppolicymakerinformationinlinewithreality. (cid:15) Inparticular,contemporaneousvaluesofoutputand (cid:15) inflationarenotknownwhenpolicydecisionsaremade. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the authors do Instrumentrulesplusvariousformsof“optimal”policy. (cid:15) Replacedecreasinggainwithconstantgain. (cid:15) Agentsaretryingtorobustlytrackthechanging (cid:15) environmentinwhichtheyoperate. ConcentrateonoperationalrulesinthesenseofMcCallum. (cid:15) Inparticular,contemporaneousvaluesofoutputand (cid:15) inflationarenotknownwhenpolicydecisionsaremade. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the authors do Instrumentrulesplusvariousformsof“optimal”policy. (cid:15) Replacedecreasinggainwithconstantgain. (cid:15) Agentsaretryingtorobustlytrackthechanging (cid:15) environmentinwhichtheyoperate. ConcentrateonoperationalrulesinthesenseofMcCallum. (cid:15) Keeppolicymakerinformationinlinewithreality. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry What the authors do Instrumentrulesplusvariousformsof“optimal”policy. (cid:15) Replacedecreasinggainwithconstantgain. (cid:15) Agentsaretryingtorobustlytrackthechanging (cid:15) environmentinwhichtheyoperate. ConcentrateonoperationalrulesinthesenseofMcCallum. (cid:15) Keeppolicymakerinformationinlinewithreality. (cid:15) Inparticular,contemporaneousvaluesofoutputand (cid:15) inflationarenotknownwhenpolicydecisionsaremade. ... butmostproduceexpectationalinstabilityinthissetting. (cid:15) Policymakersfollowingtheserecommendedapproachesin (cid:15) thisenvironmentwouldbesurprisedtofindthatthe economydoesnotcoordinateontheintendedequilibrium. Toobtainexpectationalstability,usethe (cid:15) expectations-basedrulesofEvans-Honkapohja(2003, 2006). Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Main findings Therearemanyrecommendedgoodor“optimal”policies (cid:15) forthismodel... Policymakersfollowingtheserecommendedapproachesin (cid:15) thisenvironmentwouldbesurprisedtofindthatthe economydoesnotcoordinateontheintendedequilibrium. Toobtainexpectationalstability,usethe (cid:15) expectations-basedrulesofEvans-Honkapohja(2003, 2006). Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Main findings Therearemanyrecommendedgoodor“optimal”policies (cid:15) forthismodel... ... butmostproduceexpectationalinstabilityinthissetting. (cid:15) Toobtainexpectationalstability,usethe (cid:15) expectations-basedrulesofEvans-Honkapohja(2003, 2006). Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Main findings Therearemanyrecommendedgoodor“optimal”policies (cid:15) forthismodel... ... butmostproduceexpectationalinstabilityinthissetting. (cid:15) Policymakersfollowingtheserecommendedapproachesin (cid:15) thisenvironmentwouldbesurprisedtofindthatthe economydoesnotcoordinateontheintendedequilibrium. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Main findings Therearemanyrecommendedgoodor“optimal”policies (cid:15) forthismodel... ... butmostproduceexpectationalinstabilityinthissetting. (cid:15) Policymakersfollowingtheserecommendedapproachesin (cid:15) thisenvironmentwouldbesurprisedtofindthatthe economydoesnotcoordinateontheintendedequilibrium. Toobtainexpectationalstability,usethe (cid:15) expectations-basedrulesofEvans-Honkapohja(2003, 2006). Otherwiseconvergenceoccurs. (cid:15) WearetalkingaboutlocallytotheREE. (cid:15) Ifpolicyisexecutedcorrectly... (cid:15) ... observerswouldseeonlytheREEvaluesofkeymacro (cid:15) variables. Learningwouldappeartobeunimportant,eventhoughit (cid:15) isenforcingtheREE. Theactuallearningdynamicswouldonlybeobservedin (cid:15) anunstablesitutation. Oneanalogy: off-equilibriumplayingames. (cid:15) Anotheranalogy: defaultpunishmentinmodelswith (cid:15) endogenousdebtconstraints. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry How to think about E-stability Stabilityisnotacommonmodeofanalysisin (cid:15) macroeconomicsandmonetarypolicy. Otherwiseconvergenceoccurs. (cid:15) WearetalkingaboutlocallytotheREE. (cid:15) Ifpolicyisexecutedcorrectly... (cid:15) ... observerswouldseeonlytheREEvaluesofkeymacro (cid:15) variables. Learningwouldappeartobeunimportant,eventhoughit (cid:15) isenforcingtheREE. Oneanalogy: off-equilibriumplayingames. (cid:15) Anotheranalogy: defaultpunishmentinmodelswith (cid:15) endogenousdebtconstraints. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry How to think about E-stability Stabilityisnotacommonmodeofanalysisin (cid:15) macroeconomicsandmonetarypolicy. Theactuallearningdynamicswouldonlybeobservedin (cid:15) anunstablesitutation. WearetalkingaboutlocallytotheREE. (cid:15) Ifpolicyisexecutedcorrectly... (cid:15) ... observerswouldseeonlytheREEvaluesofkeymacro (cid:15) variables. Learningwouldappeartobeunimportant,eventhoughit (cid:15) isenforcingtheREE. Oneanalogy: off-equilibriumplayingames. (cid:15) Anotheranalogy: defaultpunishmentinmodelswith (cid:15) endogenousdebtconstraints. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry How to think about E-stability Stabilityisnotacommonmodeofanalysisin (cid:15) macroeconomicsandmonetarypolicy. Theactuallearningdynamicswouldonlybeobservedin (cid:15) anunstablesitutation. Otherwiseconvergenceoccurs. (cid:15) Ifpolicyisexecutedcorrectly... (cid:15) ... observerswouldseeonlytheREEvaluesofkeymacro (cid:15) variables. Learningwouldappeartobeunimportant,eventhoughit (cid:15) isenforcingtheREE. Oneanalogy: off-equilibriumplayingames. (cid:15) Anotheranalogy: defaultpunishmentinmodelswith (cid:15) endogenousdebtconstraints. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry How to think about E-stability Stabilityisnotacommonmodeofanalysisin (cid:15) macroeconomicsandmonetarypolicy. Theactuallearningdynamicswouldonlybeobservedin (cid:15) anunstablesitutation. Otherwiseconvergenceoccurs. (cid:15) WearetalkingaboutlocallytotheREE. (cid:15) ... observerswouldseeonlytheREEvaluesofkeymacro (cid:15) variables. Learningwouldappeartobeunimportant,eventhoughit (cid:15) isenforcingtheREE. Oneanalogy: off-equilibriumplayingames. (cid:15) Anotheranalogy: defaultpunishmentinmodelswith (cid:15) endogenousdebtconstraints. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry How to think about E-stability Stabilityisnotacommonmodeofanalysisin (cid:15) macroeconomicsandmonetarypolicy. Theactuallearningdynamicswouldonlybeobservedin (cid:15) anunstablesitutation. Otherwiseconvergenceoccurs. (cid:15) WearetalkingaboutlocallytotheREE. (cid:15) Ifpolicyisexecutedcorrectly... (cid:15) Learningwouldappeartobeunimportant,eventhoughit (cid:15) isenforcingtheREE. Oneanalogy: off-equilibriumplayingames. (cid:15) Anotheranalogy: defaultpunishmentinmodelswith (cid:15) endogenousdebtconstraints. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry How to think about E-stability Stabilityisnotacommonmodeofanalysisin (cid:15) macroeconomicsandmonetarypolicy. Theactuallearningdynamicswouldonlybeobservedin (cid:15) anunstablesitutation. Otherwiseconvergenceoccurs. (cid:15) WearetalkingaboutlocallytotheREE. (cid:15) Ifpolicyisexecutedcorrectly... (cid:15) ... observerswouldseeonlytheREEvaluesofkeymacro (cid:15) variables. Oneanalogy: off-equilibriumplayingames. (cid:15) Anotheranalogy: defaultpunishmentinmodelswith (cid:15) endogenousdebtconstraints. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry How to think about E-stability Stabilityisnotacommonmodeofanalysisin (cid:15) macroeconomicsandmonetarypolicy. Theactuallearningdynamicswouldonlybeobservedin (cid:15) anunstablesitutation. Otherwiseconvergenceoccurs. (cid:15) WearetalkingaboutlocallytotheREE. (cid:15) Ifpolicyisexecutedcorrectly... (cid:15) ... observerswouldseeonlytheREEvaluesofkeymacro (cid:15) variables. Learningwouldappeartobeunimportant,eventhoughit (cid:15) isenforcingtheREE. Anotheranalogy: defaultpunishmentinmodelswith (cid:15) endogenousdebtconstraints. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry How to think about E-stability Stabilityisnotacommonmodeofanalysisin (cid:15) macroeconomicsandmonetarypolicy. Theactuallearningdynamicswouldonlybeobservedin (cid:15) anunstablesitutation. Otherwiseconvergenceoccurs. (cid:15) WearetalkingaboutlocallytotheREE. (cid:15) Ifpolicyisexecutedcorrectly... (cid:15) ... observerswouldseeonlytheREEvaluesofkeymacro (cid:15) variables. Learningwouldappeartobeunimportant,eventhoughit (cid:15) isenforcingtheREE. Oneanalogy: off-equilibriumplayingames. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry How to think about E-stability Stabilityisnotacommonmodeofanalysisin (cid:15) macroeconomicsandmonetarypolicy. Theactuallearningdynamicswouldonlybeobservedin (cid:15) anunstablesitutation. Otherwiseconvergenceoccurs. (cid:15) WearetalkingaboutlocallytotheREE. (cid:15) Ifpolicyisexecutedcorrectly... (cid:15) ... observerswouldseeonlytheREEvaluesofkeymacro (cid:15) variables. Learningwouldappeartobeunimportant,eventhoughit (cid:15) isenforcingtheREE. Oneanalogy: off-equilibriumplayingames. (cid:15) Anotheranalogy: defaultpunishmentinmodelswith (cid:15) endogenousdebtconstraints. ConsiderthebreakdownofBrettonWoods. (cid:15) AndmaybeweshouldworryaboutSweden,aswewillsee (cid:15) below. Indeed,wewouldnotexpecttoseealotofthesecases... (cid:15) ... policymakerswouldhavetoabandontheirpolicies. (cid:15) ButconsiderFigure2inthepaper. (cid:15) InflationandtheoutputgapbehaveasiftheREEhasbeen (cid:15) attainedformanyperiods. Buteventually,expectationalerrorsaccumulateanddrive (cid:15) theeconomyawayfromthetargetedequilibrium. Doesithappen? (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Expectational instability Somemightworrythattheunstablecaseis“notreally (cid:15) observed.” ConsiderthebreakdownofBrettonWoods. (cid:15) AndmaybeweshouldworryaboutSweden,aswewillsee (cid:15) below. ... policymakerswouldhavetoabandontheirpolicies. (cid:15) ButconsiderFigure2inthepaper. (cid:15) InflationandtheoutputgapbehaveasiftheREEhasbeen (cid:15) attainedformanyperiods. Buteventually,expectationalerrorsaccumulateanddrive (cid:15) theeconomyawayfromthetargetedequilibrium. Doesithappen? (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Expectational instability Somemightworrythattheunstablecaseis“notreally (cid:15) observed.” Indeed,wewouldnotexpecttoseealotofthesecases... (cid:15) ConsiderthebreakdownofBrettonWoods. (cid:15) AndmaybeweshouldworryaboutSweden,aswewillsee (cid:15) below. ButconsiderFigure2inthepaper. (cid:15) InflationandtheoutputgapbehaveasiftheREEhasbeen (cid:15) attainedformanyperiods. Buteventually,expectationalerrorsaccumulateanddrive (cid:15) theeconomyawayfromthetargetedequilibrium. Doesithappen? (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Expectational instability Somemightworrythattheunstablecaseis“notreally (cid:15) observed.” Indeed,wewouldnotexpecttoseealotofthesecases... (cid:15) ... policymakerswouldhavetoabandontheirpolicies. (cid:15) ConsiderthebreakdownofBrettonWoods. (cid:15) AndmaybeweshouldworryaboutSweden,aswewillsee (cid:15) below. InflationandtheoutputgapbehaveasiftheREEhasbeen (cid:15) attainedformanyperiods. Buteventually,expectationalerrorsaccumulateanddrive (cid:15) theeconomyawayfromthetargetedequilibrium. Doesithappen? (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Expectational instability Somemightworrythattheunstablecaseis“notreally (cid:15) observed.” Indeed,wewouldnotexpecttoseealotofthesecases... (cid:15) ... policymakerswouldhavetoabandontheirpolicies. (cid:15) ButconsiderFigure2inthepaper. (cid:15) ConsiderthebreakdownofBrettonWoods. (cid:15) AndmaybeweshouldworryaboutSweden,aswewillsee (cid:15) below. Buteventually,expectationalerrorsaccumulateanddrive (cid:15) theeconomyawayfromthetargetedequilibrium. Doesithappen? (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Expectational instability Somemightworrythattheunstablecaseis“notreally (cid:15) observed.” Indeed,wewouldnotexpecttoseealotofthesecases... (cid:15) ... policymakerswouldhavetoabandontheirpolicies. (cid:15) ButconsiderFigure2inthepaper. (cid:15) InflationandtheoutputgapbehaveasiftheREEhasbeen (cid:15) attainedformanyperiods. ConsiderthebreakdownofBrettonWoods. (cid:15) AndmaybeweshouldworryaboutSweden,aswewillsee (cid:15) below. Doesithappen? (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Expectational instability Somemightworrythattheunstablecaseis“notreally (cid:15) observed.” Indeed,wewouldnotexpecttoseealotofthesecases... (cid:15) ... policymakerswouldhavetoabandontheirpolicies. (cid:15) ButconsiderFigure2inthepaper. (cid:15) InflationandtheoutputgapbehaveasiftheREEhasbeen (cid:15) attainedformanyperiods. Buteventually,expectationalerrorsaccumulateanddrive (cid:15) theeconomyawayfromthetargetedequilibrium. ConsiderthebreakdownofBrettonWoods. (cid:15) AndmaybeweshouldworryaboutSweden,aswewillsee (cid:15) below. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Expectational instability Somemightworrythattheunstablecaseis“notreally (cid:15) observed.” Indeed,wewouldnotexpecttoseealotofthesecases... (cid:15) ... policymakerswouldhavetoabandontheirpolicies. (cid:15) ButconsiderFigure2inthepaper. (cid:15) InflationandtheoutputgapbehaveasiftheREEhasbeen (cid:15) attainedformanyperiods. Buteventually,expectationalerrorsaccumulateanddrive (cid:15) theeconomyawayfromthetargetedequilibrium. Doesithappen? (cid:15) AndmaybeweshouldworryaboutSweden,aswewillsee (cid:15) below. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Expectational instability Somemightworrythattheunstablecaseis“notreally (cid:15) observed.” Indeed,wewouldnotexpecttoseealotofthesecases... (cid:15) ... policymakerswouldhavetoabandontheirpolicies. (cid:15) ButconsiderFigure2inthepaper. (cid:15) InflationandtheoutputgapbehaveasiftheREEhasbeen (cid:15) attainedformanyperiods. Buteventually,expectationalerrorsaccumulateanddrive (cid:15) theeconomyawayfromthetargetedequilibrium. Doesithappen? (cid:15) ConsiderthebreakdownofBrettonWoods. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Expectational instability Somemightworrythattheunstablecaseis“notreally (cid:15) observed.” Indeed,wewouldnotexpecttoseealotofthesecases... (cid:15) ... policymakerswouldhavetoabandontheirpolicies. (cid:15) ButconsiderFigure2inthepaper. (cid:15) InflationandtheoutputgapbehaveasiftheREEhasbeen (cid:15) attainedformanyperiods. Buteventually,expectationalerrorsaccumulateanddrive (cid:15) theeconomyawayfromthetargetedequilibrium. Doesithappen? (cid:15) ConsiderthebreakdownofBrettonWoods. (cid:15) AndmaybeweshouldworryaboutSweden,aswewillsee (cid:15) below. Taylorrulefairsbetterthansomeotherrecommended (cid:15) rulesstudiedlaterinthepaper. Instabilityrequiresthecombinationofoperationalrules (cid:15) withconstantgainlearning. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Taylor-type rules Somepotentialforinstabilityinthecalibratedcase. (cid:15) Instabilityrequiresthecombinationofoperationalrules (cid:15) withconstantgainlearning. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Taylor-type rules Somepotentialforinstabilityinthecalibratedcase. (cid:15) Taylorrulefairsbetterthansomeotherrecommended (cid:15) rulesstudiedlaterinthepaper. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Taylor-type rules Somepotentialforinstabilityinthecalibratedcase. (cid:15) Taylorrulefairsbetterthansomeotherrecommended (cid:15) rulesstudiedlaterinthepaper. Instabilityrequiresthecombinationofoperationalrules (cid:15) withconstantgainlearning. Resultsforcommitmentcasesimilar. (cid:15) Itrepresentsoptimalpolicyunderdiscretionifthe (cid:15) policymakerhasapreferenceforinterestratesmoothing. Theruleis (cid:15) ϕλ ϕα i = π + x x . (1) t t t α α i i Producesdeterminacyifα sufficientlylarge. i (cid:15) Producesexpectationalinstabilityifα sufficientlysmall. i (cid:15) SimilarresultsforDuffy/Xiaoundercommitment. (cid:15) Worrisome. (cid:15) Theexpectations-basedapproachofEvansand (cid:15) Honkapohjasolvesthisproblemandprovidesrobust expectationalstability. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Duffy and Xiao TheDuffy/XiaoruleisaTaylor-typerule. (cid:15) Resultsforcommitmentcasesimilar. (cid:15) Theruleis (cid:15) ϕλ ϕα i = π + x x . (1) t t t α α i i Producesdeterminacyifα sufficientlylarge. i (cid:15) Producesexpectationalinstabilityifα sufficientlysmall. i (cid:15) SimilarresultsforDuffy/Xiaoundercommitment. (cid:15) Worrisome. (cid:15) Theexpectations-basedapproachofEvansand (cid:15) Honkapohjasolvesthisproblemandprovidesrobust expectationalstability. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Duffy and Xiao TheDuffy/XiaoruleisaTaylor-typerule. (cid:15) Itrepresentsoptimalpolicyunderdiscretionifthe (cid:15) policymakerhasapreferenceforinterestratesmoothing. Theruleis (cid:15) ϕλ ϕα i = π + x x . (1) t t t α α i i Producesdeterminacyifα sufficientlylarge. i (cid:15) Producesexpectationalinstabilityifα sufficientlysmall. i (cid:15) SimilarresultsforDuffy/Xiaoundercommitment. (cid:15) Worrisome. (cid:15) Theexpectations-basedapproachofEvansand (cid:15) Honkapohjasolvesthisproblemandprovidesrobust expectationalstability. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Duffy and Xiao TheDuffy/XiaoruleisaTaylor-typerule. (cid:15) Itrepresentsoptimalpolicyunderdiscretionifthe (cid:15) policymakerhasapreferenceforinterestratesmoothing. Resultsforcommitmentcasesimilar. (cid:15) Producesdeterminacyifα sufficientlylarge. i (cid:15) Producesexpectationalinstabilityifα sufficientlysmall. i (cid:15) SimilarresultsforDuffy/Xiaoundercommitment. (cid:15) Worrisome. (cid:15) Theexpectations-basedapproachofEvansand (cid:15) Honkapohjasolvesthisproblemandprovidesrobust expectationalstability. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Duffy and Xiao TheDuffy/XiaoruleisaTaylor-typerule. (cid:15) Itrepresentsoptimalpolicyunderdiscretionifthe (cid:15) policymakerhasapreferenceforinterestratesmoothing. Resultsforcommitmentcasesimilar. (cid:15) Theruleis (cid:15) ϕλ ϕα i = π + x x . (1) t t t α α i i Producesexpectationalinstabilityifα sufficientlysmall. i (cid:15) SimilarresultsforDuffy/Xiaoundercommitment. (cid:15) Worrisome. (cid:15) Theexpectations-basedapproachofEvansand (cid:15) Honkapohjasolvesthisproblemandprovidesrobust expectationalstability. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Duffy and Xiao TheDuffy/XiaoruleisaTaylor-typerule. (cid:15) Itrepresentsoptimalpolicyunderdiscretionifthe (cid:15) policymakerhasapreferenceforinterestratesmoothing. Resultsforcommitmentcasesimilar. (cid:15) Theruleis (cid:15) ϕλ ϕα i = π + x x . (1) t t t α α i i Producesdeterminacyifα sufficientlylarge. i (cid:15) SimilarresultsforDuffy/Xiaoundercommitment. (cid:15) Worrisome. (cid:15) Theexpectations-basedapproachofEvansand (cid:15) Honkapohjasolvesthisproblemandprovidesrobust expectationalstability. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Duffy and Xiao TheDuffy/XiaoruleisaTaylor-typerule. (cid:15) Itrepresentsoptimalpolicyunderdiscretionifthe (cid:15) policymakerhasapreferenceforinterestratesmoothing. Resultsforcommitmentcasesimilar. (cid:15) Theruleis (cid:15) ϕλ ϕα i = π + x x . (1) t t t α α i i Producesdeterminacyifα sufficientlylarge. i (cid:15) Producesexpectationalinstabilityifα sufficientlysmall. i (cid:15) Worrisome. (cid:15) Theexpectations-basedapproachofEvansand (cid:15) Honkapohjasolvesthisproblemandprovidesrobust expectationalstability. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Duffy and Xiao TheDuffy/XiaoruleisaTaylor-typerule. (cid:15) Itrepresentsoptimalpolicyunderdiscretionifthe (cid:15) policymakerhasapreferenceforinterestratesmoothing. Resultsforcommitmentcasesimilar. (cid:15) Theruleis (cid:15) ϕλ ϕα i = π + x x . (1) t t t α α i i Producesdeterminacyifα sufficientlylarge. i (cid:15) Producesexpectationalinstabilityifα sufficientlysmall. i (cid:15) SimilarresultsforDuffy/Xiaoundercommitment. (cid:15) Theexpectations-basedapproachofEvansand (cid:15) Honkapohjasolvesthisproblemandprovidesrobust expectationalstability. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Duffy and Xiao TheDuffy/XiaoruleisaTaylor-typerule. (cid:15) Itrepresentsoptimalpolicyunderdiscretionifthe (cid:15) policymakerhasapreferenceforinterestratesmoothing. Resultsforcommitmentcasesimilar. (cid:15) Theruleis (cid:15) ϕλ ϕα i = π + x x . (1) t t t α α i i Producesdeterminacyifα sufficientlylarge. i (cid:15) Producesexpectationalinstabilityifα sufficientlysmall. i (cid:15) SimilarresultsforDuffy/Xiaoundercommitment. (cid:15) Worrisome. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Duffy and Xiao TheDuffy/XiaoruleisaTaylor-typerule. (cid:15) Itrepresentsoptimalpolicyunderdiscretionifthe (cid:15) policymakerhasapreferenceforinterestratesmoothing. Resultsforcommitmentcasesimilar. (cid:15) Theruleis (cid:15) ϕλ ϕα i = π + x x . (1) t t t α α i i Producesdeterminacyifα sufficientlylarge. i (cid:15) Producesexpectationalinstabilityifα sufficientlysmall. i (cid:15) SimilarresultsforDuffy/Xiaoundercommitment. (cid:15) Worrisome. (cid:15) Theexpectations-basedapproachofEvansand (cid:15) Honkapohjasolvesthisproblemandprovidesrobust expectationalstability. SvenssonandWoodford(2005)recommendedrule (cid:15) equation(18)inthepaper. Operationalversionscanbeassociatedwithinstability (cid:15) underlearningforreasonablegainparameters. WorrisomeforSweden? Figure2? (cid:15) Thereisnothingoptimalaboutinstability. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Commitment Nointerestratesmoothing,timelessperspective,goalisto (cid:15) implementtheFOC. Operationalversionscanbeassociatedwithinstability (cid:15) underlearningforreasonablegainparameters. WorrisomeforSweden? Figure2? (cid:15) Thereisnothingoptimalaboutinstability. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Commitment Nointerestratesmoothing,timelessperspective,goalisto (cid:15) implementtheFOC. SvenssonandWoodford(2005)recommendedrule (cid:15) equation(18)inthepaper. WorrisomeforSweden? Figure2? (cid:15) Thereisnothingoptimalaboutinstability. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Commitment Nointerestratesmoothing,timelessperspective,goalisto (cid:15) implementtheFOC. SvenssonandWoodford(2005)recommendedrule (cid:15) equation(18)inthepaper. Operationalversionscanbeassociatedwithinstability (cid:15) underlearningforreasonablegainparameters. Thereisnothingoptimalaboutinstability. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Commitment Nointerestratesmoothing,timelessperspective,goalisto (cid:15) implementtheFOC. SvenssonandWoodford(2005)recommendedrule (cid:15) equation(18)inthepaper. Operationalversionscanbeassociatedwithinstability (cid:15) underlearningforreasonablegainparameters. WorrisomeforSweden? Figure2? (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Commitment Nointerestratesmoothing,timelessperspective,goalisto (cid:15) implementtheFOC. SvenssonandWoodford(2005)recommendedrule (cid:15) equation(18)inthepaper. Operationalversionscanbeassociatedwithinstability (cid:15) underlearningforreasonablegainparameters. WorrisomeforSweden? Figure2? (cid:15) Thereisnothingoptimalaboutinstability. (cid:15) Avoidscommittingtoaparticularrecursivealgorithmto (cid:15) describelearning. But,expectationalstabilitystillplaysaroleinthatanalysis. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Woodford NRE Woodford(2008)hasconsideredanalternativeapproachto (cid:15) checkingtherobustnessofpolicytothepossibilitythat expectationsmaynotbefullyrational. But,expectationalstabilitystillplaysaroleinthatanalysis. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Woodford NRE Woodford(2008)hasconsideredanalternativeapproachto (cid:15) checkingtherobustnessofpolicytothepossibilitythat expectationsmaynotbefullyrational. Avoidscommittingtoaparticularrecursivealgorithmto (cid:15) describelearning. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Woodford NRE Woodford(2008)hasconsideredanalternativeapproachto (cid:15) checkingtherobustnessofpolicytothepossibilitythat expectationsmaynotbefullyrational. Avoidscommittingtoaparticularrecursivealgorithmto (cid:15) describelearning. But,expectationalstabilitystillplaysaroleinthatanalysis. (cid:15) “extra”termintheactuallawofmotion. (cid:15) expectationalstabilityconditionsunchanged. (cid:15) BullardandSuda(2008). (cid:15) Standardrecursivelearningexercise,butreplaceclassical (cid:15) econometricianswithBayesianeconometricians. Mainresultsstillhold: (cid:15) Stabilitystillanissue. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Bayesian approaches ManyfeelthatrecursivelearningshouldbeBayesian. (cid:15) “extra”termintheactuallawofmotion. (cid:15) expectationalstabilityconditionsunchanged. (cid:15) Standardrecursivelearningexercise,butreplaceclassical (cid:15) econometricianswithBayesianeconometricians. Mainresultsstillhold: (cid:15) Stabilitystillanissue. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Bayesian approaches ManyfeelthatrecursivelearningshouldbeBayesian. (cid:15) BullardandSuda(2008). (cid:15) “extra”termintheactuallawofmotion. (cid:15) expectationalstabilityconditionsunchanged. (cid:15) Mainresultsstillhold: (cid:15) Stabilitystillanissue. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Bayesian approaches ManyfeelthatrecursivelearningshouldbeBayesian. (cid:15) BullardandSuda(2008). (cid:15) Standardrecursivelearningexercise,butreplaceclassical (cid:15) econometricianswithBayesianeconometricians. “extra”termintheactuallawofmotion. (cid:15) expectationalstabilityconditionsunchanged. (cid:15) Stabilitystillanissue. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Bayesian approaches ManyfeelthatrecursivelearningshouldbeBayesian. (cid:15) BullardandSuda(2008). (cid:15) Standardrecursivelearningexercise,butreplaceclassical (cid:15) econometricianswithBayesianeconometricians. Mainresultsstillhold: (cid:15) expectationalstabilityconditionsunchanged. (cid:15) Stabilitystillanissue. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Bayesian approaches ManyfeelthatrecursivelearningshouldbeBayesian. (cid:15) BullardandSuda(2008). (cid:15) Standardrecursivelearningexercise,butreplaceclassical (cid:15) econometricianswithBayesianeconometricians. Mainresultsstillhold: (cid:15) “extra”termintheactuallawofmotion. (cid:15) Stabilitystillanissue. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Bayesian approaches ManyfeelthatrecursivelearningshouldbeBayesian. (cid:15) BullardandSuda(2008). (cid:15) Standardrecursivelearningexercise,butreplaceclassical (cid:15) econometricianswithBayesianeconometricians. Mainresultsstillhold: (cid:15) “extra”termintheactuallawofmotion. (cid:15) expectationalstabilityconditionsunchanged. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Bayesian approaches ManyfeelthatrecursivelearningshouldbeBayesian. (cid:15) BullardandSuda(2008). (cid:15) Standardrecursivelearningexercise,butreplaceclassical (cid:15) econometricianswithBayesianeconometricians. Mainresultsstillhold: (cid:15) “extra”termintheactuallawofmotion. (cid:15) expectationalstabilityconditionsunchanged. (cid:15) Stabilitystillanissue. (cid:15) butitisnotthatclearhowtomapthisideaintoreality. (cid:15) Measurementissues. (cid:15) Potentialgames. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Responding to expectations Policymakersseemtodothisattimes... (cid:15) Measurementissues. (cid:15) Potentialgames. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Responding to expectations Policymakersseemtodothisattimes... (cid:15) butitisnotthatclearhowtomapthisideaintoreality. (cid:15) Potentialgames. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Responding to expectations Policymakersseemtodothisattimes... (cid:15) butitisnotthatclearhowtomapthisideaintoreality. (cid:15) Measurementissues. (cid:15) Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Responding to expectations Policymakersseemtodothisattimes... (cid:15) butitisnotthatclearhowtomapthisideaintoreality. (cid:15) Measurementissues. (cid:15) Potentialgames. (cid:15) ThankstotheBankofJapanforinvitingmetoparticipate. (cid:15) Iappreciatetheattentiontostabilityissues,whichIthink (cid:15) areinsufficientlyanalyzedinmacroeconomics. Instabilitycanproducethe“bigticketlosses”that (cid:15) policymakersreallyworryabout. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Final thoughts Verynicepaperinaveryniceconference. (cid:15) Iappreciatetheattentiontostabilityissues,whichIthink (cid:15) areinsufficientlyanalyzedinmacroeconomics. Instabilitycanproducethe“bigticketlosses”that (cid:15) policymakersreallyworryabout. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Final thoughts Verynicepaperinaveryniceconference. (cid:15) ThankstotheBankofJapanforinvitingmetoparticipate. (cid:15) Instabilitycanproducethe“bigticketlosses”that (cid:15) policymakersreallyworryabout. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Final thoughts Verynicepaperinaveryniceconference. (cid:15) ThankstotheBankofJapanforinvitingmetoparticipate. (cid:15) Iappreciatetheattentiontostabilityissues,whichIthink (cid:15) areinsufficientlyanalyzedinmacroeconomics. Mainideas Whattheauthorsdo Interpretations Unstableisnotoptimal Otheranalyses Whyworry Final thoughts Verynicepaperinaveryniceconference. (cid:15) ThankstotheBankofJapanforinvitingmetoparticipate. (cid:15) Iappreciatetheattentiontostabilityissues,whichIthink (cid:15) areinsufficientlyanalyzedinmacroeconomics. Instabilitycanproducethe“bigticketlosses”that (cid:15) policymakersreallyworryabout.

James Bullard (2008, May 27). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20080528_james_bullard

@misc{wtfs_regional_speeche_20080528_james_bullard,
  author = {James Bullard},
  title = {Regional President Speech},
  year = {2008},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20080528_james_bullard},
  note = {Retrieved via When the Fed Speaks corpus}
}