Regional President Speech

THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS REDUCING DEFLATIONARY RISK IN THE U.S. JamesBullard PresidentandCEO FederalReserveBankofSt. Louis 26March2011 AssetPrices,CreditandMacroeconomicPolicies Marseille,France AnyopinionsexpressedherearemineanddonotnecessarilyreflectthoseofotherFederalOpenMarketCommitteeeparticipants. THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS THE STATE OF PLAY Worldwideeconomicrecoverycontinues. Duringtherecoveryprocess,economiesaresusceptibleto furthernegativeshocks. Negativeshockscandampeninflationexpectations. Howtocombatethispossibilitywhenpolicyratesarealready nearzero? Someofthematerialinthistalkisbasedonmypaper,"SevenFaces of‘thePeril’",whichappearedintheSeptember-October2010issue oftheFederalReserveBankofSt.LouisReview. THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS MARKET-BASED U.S. INFLATION EXPECTATIONS THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS CURRENT U.S. MONETARY POLICY Near-zeropolicyrate. Largequantitativeeasingprogram. “Extendedperiod”languagefornear-zeropolicyrate. Conventionalwisdomreactiontoanegativeshock: lengthenthe “extendedperiod.” CouldthissendtheU.S.(andEurope)toaliquiditytrap? THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS BENHABIB, SCHMITT-GROHE, AND URIBE Consideramodelwiththreegenericfeatures: AFisherrelation. AmonetaryauthoritywhichfollowsaTaylor-typepolicyrule. Thezerolowerboundonnominalinterestrates. Modelswiththesefeaturespossessanunintendedsteadystate. Theunintendedsteadystateischaracterizedby: Short-termnominalinterestratesatornearzero. Inflationconsistentlybelowtarget. THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS BENHABIB, SCHMITT-GROHE, AND URIBE THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS BENHABIB, SCHMITT-GROHE, AND URIBE THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS Reactions THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS REACTIONS Macroeconomistsandpolicymakersaregenerallyvery fragmentedonthisissue. Thefollowingisalistofviews,someformal,someinformal. THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS DENIAL THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS LEARNABILITY Eusepi(2007,JME). Globalanalysis. Targetedequilibriumcanbethesolelearnablelong-runoutcome. TheTaylor-typerulehastorespondonlytopastinflation. Butmanyotherpossibilitiesexist. Coldcomfort—aformofdenial? Evans-Guse-Honkapohja(2008,EER):intendedsteadystate locallybutnotgloballystableunderlearning. THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS FOMC, 2003 THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS DISCONTINUITY THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS TRADITIONAL THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS FISCAL EXPANSION Benhabib,Schmitt-Grohe,Uribe(2002,JPE),Woodford(2003, InterestandPrices). Aggressivefiscalexpansiontoavoidaliquiditytrap. TotalgovernmentliabilitiesM+Bpromisedtogrowataratein excessofthenominalinterestrate. Thiseliminatestheliquiditytrapasasteadystateequilibrium. ThisapproachiscriticizedbyAtkeson,Chari,andKehoe(2010, QJE):implementationthroughextremegovernmentresponse. ImpracticalanddangerousinthewakeoftheEuropeansovereigndebt crisis. Japanesefiscalexpansionnearingadebt-GDPratioof200percent. THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS DETERMINISTIC PATHS FOR THE POLICY RATE Schmitt-GroheandUribe(2010,NBERWorkingPaper#16514). Setathresholdforinflationbelowthetargetrateofinflation. Ifinflationfallsbelowthethreshold,abandontheTaylor-type policyrule. Instead,followadeterministicpathforthenominalinterestrate. Involvesraisingpolicyratesindependentlyofeconomicevents. Avoidsthefiscalexpansion. THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS QUANTITATIVE EASING SuccessfulfortheU.S.andtheU.K. U.K.actualandexpectedinflationhaveremainedhigher. Threatstopermanently“monetizemoredebt”aremorecredible thanfiscalactions. Reliablypushesinflationexpectationshigher. Canbemadestatecontingentinanappropriateway. Japaneserecordshowsthatatemporarybalancesheetexpansion isnoteffective. THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS QE2: Was It Effective? THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS WHAT THE FOMC DID TheFOMCbeganslowingtherun-offofthebalancesheetin August2010. MarketsbeganpricinginadditionalactionaftertheChairman’s JacksonHolespeechlaterinAugust. ThedecisiononQEwasmadeattheNovemberFOMCmeeting. Mosteffectswerealreadypricedintofinancialmarketsatthat point. THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS EXPECTED INFLATION INCREASED THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS EQUITY PRICES INCREASED THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS THE DOLLAR DEPRECIATED THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS REAL INTEREST RATES DECLINED THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS CLASSICAL MONETARY POLICY EASING Thesearethe“classic”financialmarketeffectsonemightobserve whentheFedeasesmonetarypolicyinordinarytimes(thatis,in aninterestratetargetingenvironment). Effectsontherealeconomywouldbeexpectedtolagbysixto twelvemonths. Realeffectsaredifficulttodisentanglebecauseothershockshitthe economyinthemeantime. Thisisastandardproblemintheevaluationofmonetarypolicy. THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS ACTUAL INFLATION TURNING AROUND? THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS Conclusions THESTATEOFPLAY REACTIONSTOBENHABIB,ETAL. QE2:WASITEFFECTIVE? CONCLUSIONS CONCLUSIONS TheU.S.wassusceptibletonegativeshockswhichcould dampeninflationexpectations. Thiscouldpossiblypushtheeconomyintoaliquiditytrap. Theconventionalwisdompolicyresponsetoanegativeshockis topromisealonger“extendedperiod.” Thismaywork—butitmayalsoencouragealiquiditytrap outcome. AbetterpolicyresponsetoanegativeshockistoexpandtheQE program.

James Bullard (2011, March 25). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20110326_james_bullard

@misc{wtfs_regional_speeche_20110326_james_bullard,
  author = {James Bullard},
  title = {Regional President Speech},
  year = {2011},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20110326_james_bullard},
  note = {Retrieved via When the Fed Speaks corpus}
}