Bank Of Greece Sa · ATHEX:TELL
Bank Of Greece Sa — Federal Reserve Bank of St. Louis — Investor Presentation (May 2012)
47 slides from Bank Of Greece Sa's investor presentation, May 23, 2012
Slide 1: Remarks at Bank of Greece
Bill Gavin Federal Reserve Bank of St. Louis Remarks at Bank of Greece May 23, 2012
Slide 2: Today's talk and disclaimer on views
Today’s talk is about what macro theory implies about aspects of the policy process in the United States States. There is and always will be some discrepancy with practice. I will be glad to answer questions during and after the talk. The Th id ideas andd opinions i i iin this hi talk lk are m
Slide 3: Agenda
1. y DSGE—an element of Modern Macro Theory. 2. The U.S. monetary policy process in a DSGE model. d l 3. Is the Zero Lower Bound (ZLB) a trap?
Slide 4: Rational Expectations and Real Business Cycles
Rational Expectations and Real Business Cycles Lucas (1987, page 88) DSGE with sticky prices ◦ “I prefer to pursue the more conventional view that the real effects of policy arise … because a monetary contraction has real effects, not only l through h i information h its i f i effects, ff but b
Slide 5: Dynamic, Stochastic, General Equilibrium
Dynamic—The model is built around a long-run equilibrium ilib i and d describes d ib the h transition ii path h from f initial conditions to the steady state. Stoc Stochastic—The ast c e model ode includes c udes random a do s shocks oc s to parameters governing behavior and underlying trends. T
Slide 6: Households, firms and government in the model
Households maximize utility Firms maximize profits Government implements monetary policy Particular version is “New Keynesian” l h Results ld in all hold ll fforward-looking d l k d l models
Slide 7: Taylor rule
Rt – R* = θπ(πt – π*) + θy(yt – yt*) Inflation Gap Output Gap The % dedeviation iation of The % de deviation iation of GDP inflation from target from potential GDP Our baseline O b li assumption ti Our baseline O b li assumption ti sets θπ = 0.5 sets θy = 0.5
Slide 8: Is the zero lower bound a trap?
Maybe not ◦ Friedman (1969) Kocherlakota (2009). ◦ Williams (2009) “… central banks should 'embrace' embrace the zero lower bound.” But it can be ◦ Benhabib, Schmitt-Grohe and Uribe (2001). ◦ Output stabilization policy constrained. ◦ Saver’s are forced into risky assets to earn positive returns
Slide 9: Counterfactual experiments with the model
We run counterfactual experiments with the model by drawing shocks to aggregate demand, technology, mark-up, and monetary policy. Each policy rule is run for 25,000 years. We record the number of times the nominal interest rate gets to zero and how long each episode lasts.
Slide 10: The Dual Mandate
The Dual Mandate 1.6 Weight on output gap 1.4 (% of quarters with R≤0) o Lower Bound 1.2 1.0 Perrcent at Zero 08 0.8 0.5 (16.3%) 0.6 04 0.4 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per Episode Episode defined as having at least 2 consecutive quarters of zero nominal interest rate
Slide 11: The Dual Mandate
The Dual Mandate 1.6 Weight on output gap 1.4 (% of quarters with R≤0) o Lower Bound 1.2 1.0 0.5 (16.3%) Perrcent at Zero 08 0.8 0.6 04 0.4 0.4 ((12.4%)) 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per Episode Episode defined as having at least 2 consecutive quarters of zero nominal in
Slide 12: The Dual Mandate
The Dual Mandate 1.6 Weight on output gap 1.4 (% of quarters with R≤0) o Lower Bound 1.2 0.5 (16.3%) 1.0 Perrcent at Zero 08 0.8 0.4 (12.4%) 0.6 04 0.4 0.3 (8.2%) 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per Episode Episode defined as having at least 2 consecutive quarters of zero n
Slide 13: The Dual Mandate
The Dual Mandate 1.6 Weight on output gap 1.4 (% of quarters with R≤0) o Lower Bound 1.2 0.5 (16.3%) 1.0 0.4 (12.4%) Perrcent at Zero 08 0.8 0.6 0.3 (8.2%) 04 0.4 0.2 (4.0%) 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per Episode Episode defined as having at least 2 consecutive quarter
Slide 14: The Dual Mandate
The Dual Mandate 1.6 Weight on output gap 1.4 (% of quarters with R≤0) o Lower Bound 1.2 0.5 (16.3%) 1.0 0.4 (12.4%) Perrcent at Zero 08 0.8 0.3 (8.2%) 0.6 0.2 (4.0%) 04 0.4 0.1 (1.2%) 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per Episode Episode defined as having at least 2 consecut
Slide 15: The Dual Mandate
The Dual Mandate 1.6 Weight on output gap (% of quarters with R≤0) 1.4 o Lower Bound 1.2 0.5 (16.3%) 1.0 0.4 (12.4%) 0 3 (8.2%) 0.3 (8 2%) Perrcent at Zero 08 0.8 0.6 0.2 (4.0%) 04 0.4 0.1 ((1.2%)) 0.2 0 (0.3%) 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per Episode Episode defined as havi
Slide 16: Percent at zero lower bound by inflation weight
1.6 1.4 ower Bound 1.2 1+θπ (% of Quarters with R≤0) 1.0 nt at Zero Lo 0.8 1.5 (16.3%) 0.6 Percen 04 0.4 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of quarters per ZLB event ZLB event defined as having at least 2 consecutive quarters of zero nominal interest rate.
Slide 17: Percent at zero lower bound by inflation weight
1.6 1.4 ower Bound 1.2 1+θπ (% of Quarters with R≤0) 1.0 nt at Zero Lo 1 5 (16.3%) 1.5 (16 3%) 0.8 0.6 Percen 04 0.4 2 0 (5 2.0 (5.5%) 5%) 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of quarters per ZLB event ZLB event defined as having at least 2 consecutive quarters of zero nominal interest rate
Slide 18: Percent at zero lower bound by inflation weight
1.6 1.4 ower Bound 1.2 1+θπ (% of Quarters with R≤0) 1.0 1.5 (16.3%) nt at Zero Lo 0.8 2.0 (5.5%) 0.6 Percen 04 0.4 2.5 (2.3%) 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of quarters per ZLB event ZLB event defined as having at least 2 consecutive quarters of zero nominal interest rate.
Slide 19: Percent at zero lower bound by inflation weight
1.6 1.4 ower Bound 1.2 1+θπ (% of Quarters with R≤0) 1.0 1.5 (16.3%) nt at Zero Lo 0.8 2.0 (5.5%) 0.6 2.5 (2.3%) Percen 04 0.4 3.0 (1.2%) 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of quarters per ZLB event ZLB event defined as having at least 2 consecutive quarters of zero nominal interest rate.
Slide 20: Percent at zero lower bound by eta
1.6 1.4 Perccent at Zero Lower Bounnd 1.2 η (% quarters with R≤0) 1.0 08 0.8 0.6 0.25 (16.3%) 0.4 0.2 0.0 4 8 12 16 20 24 28 32 36 40 >40 Number of quarters per ZLB event ZLB event defined as having at least 2 consecutive quarters of zero nominal interest rate.
Slide 21: Percent at zero lower bound by eta
1.6 1.4 Perccent at Zero Lower Bounnd 1.2 η (% quarters with R≤0) 1.0 0.25 (16.3%) 08 0.8 0.6 0.4 0.1 (9.6%) 0.2 0.0 4 8 12 16 20 24 28 32 36 40 >40 Number of quarters per ZLB event ZLB event defined as having at least 2 consecutive quarters of zero nominal interest rate.
Slide 22: Percent at zero lower bound by eta
1.6 1.4 Perccent at Zero Lower Bounnd 1.2 η (% quarters with R≤0) 1.0 0.25 (16.3%) 08 0.8 0.6 0.1 (9.6%) 0.4 0 5 (16.8%) 0.5 (16 8%) 0.2 0.0 4 8 12 16 20 24 28 32 36 40 >40 Number of quarters per ZLB event ZLB event defined as having at least 2 consecutive quarters of zero nominal interest rate.
Slide 23: Percent at zero lower bound by eta
1.6 1.4 Perccent at Zero Lower Bounnd 1.2 η (% quarters with R≤0) 1.0 0.25 (16.3%) 08 0.8 0.1 (9.6%) 0.6 0.5 (16.8%) 0.4 0.999 (16.8%) 0.2 0.0 4 8 12 16 20 24 28 32 36 40 >40 Number of quarters per ZLB event ZLB event defined as having at least 2 consecutive quarters of zero nominal interest rate.
Slide 24: Avoiding the zero lower bound
Output and unemployment are volatile Taylor rule transfers that volatility to interest rates and inflation Giving up the dual mandate is one way to avoid the zero lower bound. Being extremely aggressive in fighting inflation also works.
Slide 25: How can the Fed commit to a long-run inflation target?
How can the Fed commit to a long-run inflation target?? ◦ It has to make past target misses part of future targets. ◦ The objective is also to target the long-run inflation rate rather than just the short-run inflation rate. (German 1985, (Germany 1985 New Ne Zealand, Zealand Canada Canada, UK UK,
Slide 26: Taylor rule with price level gap
Rt – R* = θπ(πt – π*) + θy(yt – yt*) Rt – R* = θπ(πt – π*) + θy(yt – yt*) + θp(pt – pt*) A small weight on a price path is a promise to offset past short-run inflation target misses!
Slide 27: Zero lower bound with weight on price level
1.6 Weight on output is 0.5 1.4 Perrcent at Zeroo Lower Bouund 1.2 W i h on price Weight i level l l 1.0 08 0.8 R≤0 16.3% of all quarters 0 0.6 0.4 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per ZLB Event A ZLB event is defined as havingg at least 2 consecutive qquarters of zero nomin
Slide 28: Zero lower bound with weight on price level
1.6 Weight on output is 0.5 1.4 Perrcent at Zeroo Lower Bouund 1.2 W i h on price Weight i level l l 1.0 08 0.8 0 0.6 R≤0 2.2% of all quarters 0.1 0.4 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per ZLB Event A ZLB event is defined as havingg at least 2 consecutive qquarters of zero no
Slide 29: Zero lower bound with weight on price level
1.6 Weight on output is 0.5 1.4 Perrcent at Zeroo Lower Bouund 1.2 W i h on price Weight i level l l 1.0 0 08 0.8 0.6 0.1 R≤0 0.4 0.6% of all quarters 0.2 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per ZLB Event A ZLB event is defined as havingg at least 2 consecutive qquarters of zer
Slide 30: Zero lower bound with weight on price level
1.6 Weight on output is 0.5 1.4 Perrcent at Zeroo Lower Bouund 1.2 W i h on price Weight i level l l 1.0 0 08 0.8 0.1 0.6 0.2 R≤0 0.4 0.3% of all quarters 0.3 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per ZLB Event A ZLB event is defined as havingg at least 2 consecutive qquarters of
Slide 31: Taylor rule with no weight on price level gap
0.50 0.45 ound 0.40 Peercent at Zeero Lower Bo 0.35 0.30 Taylor Rule with no weight on a 0.25 Price level gap 0.20 0.15 0 10 0.10 0.05 0.00 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per Episode Episode defined as having at least 4 consecutive quarters of deflation
Slide 32: Taylor rule with 0.1 weight on price level gap
0.50 0.45 ound 0.40 Peercent at Zeero Lower Bo 0.35 0.30 Taylor Rule with 0.1 weight on 0.25 a Price level gap 0.20 0.15 0 10 0.10 0.05 0.00 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per Episode Episode defined as having at least 4 consecutive quarters of deflation
Slide 33: Taylor rule with 0.2 weight on price level gap
0.50 0.45 ound 0.40 Peercent at Zeero Lower Bo 0.35 0.30 Taylor Rule with 0.2 weight on 0.25 a Price level gap 0.20 0.15 0 10 0.10 0.05 0.00 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per Episode Episode defined as having at least 4 consecutive quarters of deflation
Slide 34: Taylor rule with 0.3 weight on price level gap
0.50 0.45 ound 0.40 Peercent at Zeero Lower Bo 0.35 0.30 Taylor Rule with 0.3 weight on 0.25 a Price level gap 0.20 0.15 0 10 0.10 0.05 0.00 4 8 12 16 20 24 28 32 36 40 44 Number of Quarters per Episode Episode defined as having at least 4 consecutive quarters of deflation
Slide 35: Proposed higher inflation targets
Summers – 1990 (3%) Rogoff - 2009 (4 to 6%) Blanchard - 2009 (3 to 5%)
Slide 36: Zero lower bound with higher inflation targets
1.8 1.6 16 Lower Bound d 1.4 1.2 10 1.0 Percennt at Zero L 0.8 R≤0 16.3% of all quarters 2% 0.6 0.4 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of quarters per ZLB event ZLB event defined as havingg at least 2 consecutive qquarters of zero nominal interest rate.
Slide 37: Zero lower bound with higher inflation targets
1.8 1.6 16 Lower Bound d 1.4 1.2 10 1.0 2% Percennt at Zero L 0.8 0.6 R≤0 12 8% of all quarters 12.8% 3% 0.4 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of quarters per ZLB event ZLB event defined as havingg at least 2 consecutive qquarters of zero nominal interest rate.
Slide 38: Zero lower bound with higher inflation targets
1.8 1.6 16 Lower Bound d 1.4 1.2 R≤0 10 1.0 20 4% off all 20.4% ll quarters t 1% Percennt at Zero L 0.8 2% 0.6 0.4 3% 0.2 0.0 4 8 12 16 20 24 28 32 36 40 44 Number of quarters per ZLB event ZLB event defined as havingg at least 2 consecutive qquarters of zero nominal interest rate.
Slide 39: Japan adjusted to the zero lower bound
Japan adjusted to the zero lower bound by allowing the h inflation i fl i objective bj i to fall f ll below b l zero.
Slide 40: Japan government bond yield and money market rate
6 5 Yield on 10-year Government Bonds Percent at annual Rate e 4 3 Money Market Rate 2 1 0 1992 1996 2000 2004 2008 2012 Note that N h the h equilibrium ilib i has h a near zero policyli rate, a slightly li h l positive real rate and a slightly negative inflation rate.
Slide 41: Japan and the U.S. return to normal
Japan adjusted to the zero lower bound by allowing the h inflation i fl i objective bj i to fall f ll below b l zero. In the United States there is still widespread belief tthat at wee ca can return etu to normal. o a ◦ Fed funds rate around 3.5 to 4 percent. ◦ Total reserves around $50 billion.
Slide 42: Before and after Paul Volcker
20 Before Paul Volcker After Paul Volcker 18 16 Percent Annual Rate 14 12 10 10-yr Treasury Bond Rate 8 6 4 2 Federal Funds Rate 0
Slide 43: Federal funds rate states
10 9 10-yr 10- Treasury yield Fed funds rate 8 7 6 5 4 3 2 1 0 The federal funds rate has 3 states: A high state ≈ 10-yr Bond d yield; ld a low l state = 0, andd a transition state.
Slide 44: Fisher equation and real interest rates
R = real interest rate + expected inflation In a DSGE model with an fixed R ◦ Inflation adjusts to clear the bond market ◦ Taxes and risk premiums make calculations more complex, but ◦ the h Fisher h equation for f bonds b d holds h ld in all ll finance f and d economic models, not just DSGE.
Slide 45: Fed promise to keep rate at zero for an extended period
The Fed has promised to keep R=0 for “an extended p period.” ◦ If real rates rise and R=0, inflation may fall. ◦ If inflation falls, Fed will want to lower the rate. p y of what happened ◦ Replay pp in JJapan p after 1995? The ‘extended period’ language: Is ‘until late 2014’ a forecast or a comm
Slide 46: Conclusions
DSGE models are the application of modern economic theory to policy analysis. The Dual Mandate in the United States is a recipe for hitting the zero lower bound. The zero lower bound is a trap because because, when policy is credible, low interest rates put downward pressure on inflation throu
Slide 47: Any Questions?
U.S. Monetary Policy—a View from Macro Theory Any Questions?
Federal Reserve Bank of St. Louis — Investor Presentation (May 2012) on 6ix