Regional President Speech

OVERVIEW DISCUSSION CONCLUSIONS DISCUSSION OF HARRIS, KASMAN, SHAPIRO, AND WEST: OIL AND THE MACROECONOMY—LESSONS FOR MONETARY POLICY JamesBullard* FederalReserveBankofSt. Louis 2009U.S.MonetaryPolicyForum NewYork,NY February27,2009 ViewsexpressedarethoseoftheauthoranddonotnecessarilyreflectofficialpositionsoftheFOMCortheFederalReserveSystem. OVERVIEW DISCUSSION CONCLUSIONS A GREAT SUMMARY OF ISSUES Thenatureandevolutionoftheglobaloilmarket. Analysisoftheclaimofalong-lasting,demand-basedriseinoil pricesinthe2000s. Impactuneven;assessmentrequiresaglobal,general equilibriumview. NKanalysissuggeststargetingthestickyprices. Theauthorsquestionthe"anchoredexpectations"aspectofthis. HKSW:Fedoverplayedthe"coreinflation"cardduringtheoil pricerun-up. HKSW:AggressiveeasingbytheFedin2007and2008was appropriate. OVERVIEW DISCUSSION CONCLUSIONS SOME DISCUSSION AREAS Thedemandexplanationfortherun-upinoilprices. Optimalpriceindexesformonetarypolicy. Theroadahead: long-termpricechanges. Globaldimensionsofmonetarypolicy. Interpretationsofexpectedinflation: aproblem. OVERVIEW DISCUSSION CONCLUSIONS OVERVIEW DISCUSSION CONCLUSIONS THE DEMAND EXPLANATION "Worldoilequilibrium"1987-2003: About$30/bblinreal2007$, WTI. Abruptstructuralchangein2003—probablystatistically significantbynow. Why? Emergingmarketsweregrowingbothbeforeandsince. A threshold? Related: The2008peakinoilpriceswaslargerinrealtermsthan the1980peak. Suggeststhattheoilshockmayhavebeenasignificant contributortothesharpdeteriorationinfall2008. Unemploymentclaimsandjobsnumbersdeterioratedbefore intensifiedfinancialturmoil. Mitigatingfactor: decliningenergyintensity. OVERVIEW DISCUSSION CONCLUSIONS ENERGY INTENSITY OVERVIEW DISCUSSION CONCLUSIONS CURRENT PRICE INDEXES FOR MONETARY POLICY “Coreinflation”isanarbitraryconceptforvolatilitycorrection. Whytaketheseparticularpricesout,butnotothers? CandamagethecredibilityoftheFedwhenexcludedpricesare changingrapidly. Weneedtodobetter. Oneappropriateconceptforvolatilitycorrection: filtering. Theidea:pricesthataremorevolatileprovidelessreliablesignals foroverallinflation. Allpricesgetincluded,butareweightedbyappropriate signal-to-noiseratios. Agoodareaforresearch. OVERVIEW DISCUSSION CONCLUSIONS OPTIMAL PRICE INDEXES FOR MONETARY POLICY NKmodels: Thepriceindexshouldaggregatethepricesfrom thestickypricesector. But,observedpriceshave“degreesofstickiness.” Couldconstructanindexonthisbasis,andoilwouldpresumably beweightedzero. Stickyprices,generallyviewedastheweakestassumptioninthe NKframework. Hangourhatsonthat? Flexiblevs. stickyprices—ofaninput? Bodenstein,Erceg,Guerrieri(2008):flexibly-pricedinputusage wouldmatterforpolicymaking. Smallsharesforoil,butsharesarenotsmallforflexibly-priced inputsgenerally. OVERVIEW DISCUSSION CONCLUSIONS LONG-TERM RELATIVE PRICE CHANGE Alotofdiscussionaboutoilrevolvesaroundthepossibilityof long-term“trend-like”behavior. Isitreasonabletothinkthattheremaybelong-term“trend-like” behaviorinoilprices? Totheextentthatoilisafiniteresource,thisseemsreasonable. Explosivedemandfromthedevelopingworldoverthecoming decades. Theoppositeofother,well-known,long-termpricetrends? ConsiderJovanovicandRousseau(2002),“Moore’sLawand LearningByDoing,”Rev.Econ.Dyn. OVERVIEW DISCUSSION CONCLUSIONS LONG-TERM PRICE TRENDS: COMPUTERS OVERVIEW DISCUSSION CONCLUSIONS LONG-TERM PRICE TRENDS: ELECTRICITY OVERVIEW DISCUSSION CONCLUSIONS LONG-TERM PRICE TRENDS: MOTOR VEHICLES OVERVIEW DISCUSSION CONCLUSIONS GLOBAL EQUILIBRIUM OpeneconomyNKmodels(CGG,2002): optimalpriceindexis tofocusondomesticprices,again,thestickysector. Thisgivesusathirdwaytothinkabouttheoptimalpriceindex. IntheNKcontext,“badpolicy”means“doesnotrespond aggressivelyenoughtoinflation.” Globalimplications? SeeBullardandSingh(2008),“Worldwide MacroeconomicStability,”J.Monet. Econ. Determinacyofworldwideequilibriumdependsonthejoint behaviorofpolicymakersworldwide. Indeterminacyexposesalleconomiestoendogenousvolatility, evenoneswheremonetarypolicymaybejudgedappropriatefrom aclosedeconomyperspective. Rationaleforatypeofinternationalpolicycoordination. OVERVIEW DISCUSSION CONCLUSIONS INTERPRETATIONS OF EXPECTED INFLATION: A PROBLEM Theproblemwithdirectmeasuresofexpectations(p. 24,BEI). Theexpectationscanbestablebecauseparticipantsexpectthe Fedto“dotherightthing.” Butiftheexpectationsdonotmove,thepolicymakerinterprets thatasareasontodonothing. Inastandard(oneshock)NKmodel: Inflationwouldneverdeviatefromtargetbecausemonetarypolicy wouldhavethepowertooffsetshocksexactly. Surveyswouldrevealthattheprivatesectorexpectstheinflation ratetoremainexactlyatthetarget. Butnominalinterestrateswouldbemovingupanddownevery dayinresponsetotheincomingshocks. The“expectedinflationsseemwell-anchored”argumentis sometimesusedimproperlyinpolicydiscussions. OVERVIEW DISCUSSION CONCLUSIONS OIL AND INFLATION EXPECTATIONS HKSW:Possibly,failingtorespondtopersistentoilpriceshocks wouldleavelonger-termexpectationsunanchored. Thiserodescredibilitybecausethepurposeofcoreistohelphit overallinflationtargetsmediumterm. Thepubliccannottellifthemissisintentionalorbecauseofthe persistentenergypricemovements. IlikedthesimulationsinSectionA5. OVERVIEW DISCUSSION CONCLUSIONS MONETARY POLICY Onemainanecdotalstoryinthespringandsummerof2008: a sortofdoublingdownbehaviorbyhedgefundsandothermajor playersincommoditiesmarkets. Stoppedat2Qend. Relatedtothefinancialcrisis. TheFeddebateduringthespringandsummerwasinthe contextofalreadyaggressiveeasing. TheECBandtheFedplayeddifferentstrategies,butendedupin thesameplace. OVERVIEW DISCUSSION CONCLUSIONS CONCLUSIONS Ilikethetopic. Ilikethepaper. Oilpriceswillremainakeyissueformonetarypolicyincoming decades.

James Bullard (2009, February 26). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20090227_james_bullard

@misc{wtfs_regional_speeche_20090227_james_bullard,
  author = {James Bullard},
  title = {Regional President Speech},
  year = {2009},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20090227_james_bullard},
  note = {Retrieved via When the Fed Speaks corpus}
}