Monetary policy. This is part of a conference on inflation hosted by the Brookings Institution center on fiscal and Monetary Policy. Its about an hour. And then were going to move to the next segment, which is really important, because it seems to me that theres a question not only about what we should do, but how we should get there. And it may that be we have something to learn from the canadian experience. So i want to introduce john david murray, who was, for 32 years at bank of canada, 32 or 34, john . 4 years at the bank of canada. Last four as deputy governor. He retired three years ago and is now an academic and a board member. Hes going to talk a little bit about how the bank of canada has come to have a much more organized process about reviewing the framework. And then the president of the Federal Reserve bank of boston, who has been thinking about just that question, is going to respond. So, john . Is this mic on . Thank you. There should be a power point that accompanies this. Not that one. [laughter] h. There. You can see what i propose to talk about, and for central bankers in the room, this will usually make them apoplectic. Partnering with the government, but ill explain what i mean, and it relates to davids introduction, the special way that we partner with the government in canada, and perhaps what im going to relay is somewhat unique and specific to canada. The i think youll find it interesting, and beyond that, i also think that there are more general lessons here, so dont want to oversell it. First thing id like to say is that, in fact, standing things on their head a little, when inflation targeting came to canada, it was actually the government that proposed it, not the bank of canada. Now, you might say why would they do that . Three quick reasons come to mind. One of them, the most positive perhaps is that they thought it was a good idea, and they thought the reserved bank of new zealand provided an interesting lead, some encouragement. So thats number one. Number two is that the government was in the process of introducing a new goods and services tax, which was going to boost the headline inflation rate quite significantly, and this coincided with a situation where, unfortunately, they had to negotiate labor contracts with almost all the unions in the federal government. So you could think of them wanting an inflation target as some kind of assurance, some kind of buffer to see them through this difficult period. And the third is sort of a preemptive act that the bank of canada had started on a very sort of aggressive, determined track and was out there talking about the virtues of price stability, which i know isnt anything new for a central bank. But this was in a very direct and determined way. And although no new numeric target was given for this, when asked by a journalist what this might mean, the answer was, for inflation, four is not as good as three. Three is not as good as two. Two is not as good as one. And one is not as good as zero. So effectively, dont want to put words in his mouth, we were talking about price stability. So you can think about this as a preemptive act on the part of the government so, in their view, things didnt go too far. What was the banks reaction to this proposal . Well, it was mixed. There was the positive. They were very receptive to the idea of inflation target. They were less enthusiastic about the way the government wanted to go about it. They wanted to aim for a relatively high rate, not high by that time, but, say, 3 . And they were thinking of something sort of short term. Im going to call it a patch through this difficult period. The banks reaction to this was that it had to be meaningful, and it had to be long term. It had to be serious. And in the event, perhaps a little surprising for some, the bank of canadas view prevailed. And what we got in the end by way of the very first announcement in 1991 was an nflation target of 3 for 1992 going down to 2 in 1995, and there was a 1 ban to either side of these targets. But whats perhaps most interesting is that this was regarded as only a beginning. That after 1995, five years hence, based on experience, this issue would be revisited, but with a strong presumption, a gain that 2 was only an interesting start, and you were going lower. The first renewal of the agreement the bank had with the government in other words, 1995 was to review the experience, but it was related to that, thought of in terms of a one and done, that after five years experience, surely well have enough information that well be able to peg the rate, the optimal level of inflation for it, and thats it. So this was not seen as the beginning of an ongoing process of renewal. Key aspects of the agreement were, this was simply a joint press release by the bank and the government, and it came out as part of the governments february 1991 budget. There is no supporting legislation for this, and indeed, thats been the pattern through time. Its public. And that extent has some force. But it is agreement between parties. Its a partnership with one admittedly more equal than the other ultimately. The government of canada for a long time, its been very clear in the legislation, has the power to issue a directive to the bank of canada. If its unhappy about Monetary Policy, it can tell them what to do. This came about in 1967 as a result of events that i wont go into. But there are three conditions around that ability. One is that they have to be very specific about what they dont like. Two, they have to be very specific about what they want the bank of canada to do. And three, it has to be published. And theres always been a presumption that if it was ever used, the governor at the time would feel compeled to resign. But perhaps as a result of that, its never been used. This nuclear option. What it means is that having that in place is good in two ways in our view. That it does give ultimate responsibility for Monetary Policy to the government, but it also ensures that they cant use it too lightly. And effectively then gives the bank of canada considerable operational independence, instrument independence. Ill speak to this later, hopefully quickly. We actually see the agreement, instead of eroding that independence potentially, rather enhancing it, because once youve got the government to sign on, the scope for them to criticize, as long as youre actually doing your job, becomes more limited, so we see tremendous advantage in this public agreement, and as ill mention in a minute, this renewal process thats developed, where its refreshed every five years. Ive talked about the early ambitions regarding ultimate price stability, the origins of the process. Lets see, have i got this right, just to give you a flavor of where this was headed initially, the first bullet doesnt complete all of it, just lays out the specific targets as i described earlier. I think the last two bullets are more interesting for you. Thereafter, that means after 1995, the objective would be further reduction in inflation until price stability is achieved. The last one, based on a lot of work that the bank of canada had done in advance is, a good deal of work has already been done for canada. This work suggests a rate of increase that is clearly below 2 . You might ask, where did that come from . Well, it came from a lot of research, but the three reasons for having an inflation rate above zero at the time for us, were not regarded as that material. We had a measurement bias in the c. P. I. , but it was judged to be very low. Presently probably, and then half a percent or less now, thats not a reason to have a 2 target. We could find some statistical support for this notion of nominal wage rigidity, which would be the second argument, but our work suggests that economically it was not very important or meaningful. And because of the great moderation perhaps, we underestimated the significance of the effect of lower balance. That was something that we thought, if it did occur, surely there would be means to overcome. So thats where we were coming from at the time. In the event the target was renewed with the government in 1993, i wont go through why, instead of 1995, and its since been renewed in 1998, 2001, 2006, 2011, 2016. Its up for renewal in 2021. We referred to earlier, despite all these renewals, theres been no material change. The 2 has been maintained at the mid point, and the language around it has quietly changed. Instead of talking about price stability so often, we talk about low, stable, and predictable inflation as being the good thing. One of the reasons and its perhaps the most important reason the 2 target hasnt changed, is that the economy seemed to perform so well, better than expected, under the 2 inflation target. So thats a rather high bar for doing anything adventurous, especially youll note the dates for some of these renewals coincided with episodes in which the economy, the situation was particularly uncertainty, 2001, right after the tech bubble, 2011, well fallout from the Great Recession. But just to give you a flavor for how much things changed on the inflation front, looking good, we actually did so well that the i. M. F. And others accused us of covertly price level targeting. And you can see why, looking at this graph, that might be a reasonable suspicion. The black line shows you a hypothetical price level that is allowed to grow at 2 a year, and up until about 2012, 2014 even, were doing a remarkably good job. This came as a surprise to us. [laughter] no, not the good part. Not the good performance. We knew we were doing a great job. But when the i. M. F. Pointed this out, accused us of covertly price level targeting, which is itself a little odd, because the major benefit is to advertise it, so you can condition expectations. As we reflected on it, two things, people have referred to luck earlier, and perhaps a sequence of shocks that happened to be offsetting or similar the rick, but another thing thats been mentioned, and we learned to appreciate its importance even more is our reaction function. Like many Central Banks, put it on Interest Rate smoothing. If you think about that, that already introduces quite a bit of history independence, and you are inflation averaging unwittingly. You might as well take credit for it. Quickly, the advantages of a regular renewal process, you may say whats the point if you dont change . But theres a lot going on underneath is what ill maintain. The first, we believe this is a critical part of our accountability, that this is a critical element of our fiduciary responsibility, to canadians, to ensure on a regular basis that we are working under the best possible framework for them. Second, its a way of defusing potential problems. By that i mean, if this is a onceinalifetime event, oh, theyre going to renew the target and things might change, theres a lot of excitement around it. But if theres a regularity to it, this is business as usual. You defuse a lot of that. Were just taking care of business for you. Next, it promotes oh, wait, deliberate and transparent mechanism to engage stakeholders. This is terribly important, the Transparency Part in particular. When the bank of canada renews the agreement with the government, this isnt the product of some sort of secret discussions between the two. This is something that is initiated quite early on, and the bank of canada is very careful to lay out the issues it proposes to address. The changes that it might consider, and to invite feedback from the public, from the government, of course, from academics, and its the beginning of a sequence of often conferences as part of this process. So the transparency to our mind is very important in terms of the credibility and buyin, and thats a way of promoting Public Awareness and understanding. Its a driver. Kristin mentioned this, a driver for more focused Research Effort within the bank. And something new has actually been learned on every occasion. Its not as though we find it as deepening our understanding of the economy or the Monetary Policy process. Nothing has changed. But things are going on underneath. Possible disadvantages, some have argued by renewing every five years, perhaps youre not going to anchor expectations if the market thinks every five years theres a possibility youre going to change. Inflation expectations might not be well anchored. Ill show some counter evidence in a minute. Theres increased scope for unhelpful interference, and this has been the topic of, sarah, a lot of people today, and thats true. Theres a risk. Its a waste of time and energy. I mean, if nothing really changes in the end, whats the point . And then related to that, trying the publics patience, sort of announcement fatigue, oh, were going to renew, were going renew, oh, 2 , did i mention that . Counter arguments, theres absolutely no evidence from canada, very little, of fragile or unanchored expectations as a result of this. Its actually a mechanism for enhancing the Central Banks independence, we would maintain, and its important confirmation of the frame works 10u7bdness. Fine nothing changes, the fact that you are confirming that, in your view, we are where we should be is important. Inflation expectations, thats to show thaw this is based on two and threeyear inflation expectations. You always get a little movement, but theyre remarkably stable for that term , one to three years. And near the end, quickly, what are some of the issues the bank of canada has examined in the last 27 years . I divide them into two categories, fundamental, and then sort of House Keeping or operational. The fundamental ones, which weve always looked at, should lowered . On target be that operated everything right through the 2011 agreement. Its only in 2016 that the question was turned, and should we raise the inflation target . In the end, we didnt, and i can explain why. Maybe ill do it now very quickly. There had been this predisposition toward lower is better starting at the beginning. And this had sort of receded a little. But there had always been a sense that lower inflation, something close to price stability, would be better. And price level targeting held a lot of attraction for some of us, as a way of achieving a lower inflation rate while dealing with the effective lower bound f. Price level targeting works, it actually reducing the swings in inflation and output and Interest Rates. You need much less by way of Interest Rate movement to stabilize the real economy and inflation. The key is communications and credibility. People have to know what you want to do and believe youre going to do it. Nd that could be a big if. Would price level targeting be better . No, thats kind of good, interesting. How much recognition to give to Financial Stability considerations . Do you want to modify your reaction function in a way and give that recognition your frame work . We asked that as part of the 2016 thing, and the answer was probably not much. Wed already gone on record in 2006 speaking about leaning and its advantages am we refreshed that in 2011 and address it had again in 2016. 2016, we actually stepped back a little, whereas in 2011 wets, oh, it could be a forty line of defense. That if supervisors and regulators werent doing their job. Thats too bad. If macro tools didnt appear to work, if investors werent being provident enough, shame on them. Were institutions. Theres a fourth line of defense, if you really had to, you might lean. But by the time we got to 2016, we had been influenced by the work that shows there actually might be a negative benefit to leaning. You do more damage than good. So dont go they didnt quite run away from that in the latest renewal, but it was sort of easing back. Operational House Keeping matters, c. P. I. , the best index still, thats the one we do target, and we favor that for a number of reasons. Best measure of core inflation, thats changed a little through time. How important this measurement bias, and we confirm every time, that it isnt bigger, indeed, because of some changes that have been made by statistics canada. Its a little smaller. It wasnt big to start with, and its smaller now. Looking ahead, this is my last slide, next renewal set for 2021, bank of canada already mapping out a Research Agenda for the next five years. The final questions have not been determined yet, or else theyd be advertised. But they intend to take a broader sweep this time. Instead of just looking at the objectives or the frame work per se, but to also look at tools in more detail and communication. Old issues will almost certainly be revisited. Other new initiatives will no doubt be added. Here in terms of the undamental issues, while weve done a lot ive retired. I shouldnt say we. While the bank of canada has done a lot of work on lowering inflation its advantages or cost, price level targeting, while we talked about it and did some work, we didnt talk about nominal g. D. P. Targeting, and i think that is going to be revisited in level form as opposed to growth rate. I cant be sure. This isnt based on information or inflation averaging, or instead of, we already inflation average, we happened to pick a 12month period for that. Like australia over the cycle, and as i mentioned earlier, we already do it kind of with our Interest Rate smoothing and the reaction function. So thats some of what will be looked at. But the main takeway i want to give you is that the bank of canada really values this renewal process, and it doesnt become sort of a dogfight between the central bank and the government. Maybe thats an unusual situation. Now, you may argue you may argue that you cant take much comfort from that, because weve never proposed a major change. Why would the government sort of be nasty or push back . And thats a fair argument. But turning it on its head a little, i can say, from my experience, i am not aware of the government ever pushing us to do something or to change something, like wouldnt a little higher inflation be nice for everyone. So the fact that that question was raised in 2016 and examined isnt at the behest of the government or anything, you know, take it easy. No, very much the bank has been carrying the load on the proposals, the proposed changes, and the research, bringing the government in at the end. It is a partnership, and obviously they have final, final say to a degree. But theres a lot thats going on. Ill end with this. What did i mean by a lot going on underneath . Although we didnt change anything major. You can see where we started. There was a strong presumption that we were going lower. We had research to support it. was nowhere near price stability, and price stability would be of tremendous benefit to the economy. Because measurement is a problem. Nominal wage doesnt matter. The effective lower bound doesnt matter. The first two really havent changed materially. The third one clearly, based on experience, has gained more importance. But where i think we come out in the end is that the painful experience lets call it painful the experience with the Great Recession, unconventional Monetary Policy, which we still believe works effectively, you just have to try harder, sort of gave us a slight a different view on the importance of the effective of lower bound. But i think bank of canada just reached a point where it made it happier about 2 as opposed to reviving its view about how igh it needed to go. Feel the unconventional tools are effective, the feel that fiscal policy could play more of a partnering role in desperate situations hopefully, so youre not on your own, it doesnt become a head wind instead of a tail wind. Just a number of things, and also this view, this judgment that its a little early to call a big change in the neutral rate. And i like the point that was made based on John Williams craft. Sure, people are in the habit of saying, oh, its been going down for 25, 30 years. Maybe a little, because of demographic things, but it didnt fall off a cliff because of those. And to sort of take that as your base now, oh, its a random walk from there, i dont know. That seems a little presumptive. So anyway, ill stop. So now were going to turn to eric rosengren, who im sure will Say Something he said earlier in a lunch we had, maybe all thats different is the canadians are nicer so they can do this. Thank you very much. Let me just put johns very nice presentation in the context of this conference. So this conference started by Larry Summers talking about the fact that very low Interest Rates for a long time were both quite likely and quite costly. The second panel then talked about what are the possible solutions, giving a number of different frame works that would make that less likely or less costly. The third panel put together a group of stakeholders and talked about more broadly how the various stake holders should care about this issue. And this final panel is really to talk about process. And so i am going to talk about process in this panel rather than necessarily go into detail about the various proposals that have already been discussed. So we heard what bank of canada did, and i think it was a very clear presentation, so thank you very much for that, john. Im going to put it in the context of how applicable is this to the United States. There are a lot of differences between the United States and canada. Ill start with, we start with a very different frame work. So we do have a dual mandate, so its maximum sustainable employment and stable prices. Weve explicitly defined the price part of that to be a 2 total p. C. E. Inflation. The maximum employment, we didnt provide a numerical target because it was viewed the natural rate moved around. And finally, how do we deal with the fact that when were missing on both of those two elements of the mandate . We take a balanced approach. Don was the one who highlighted that we dont talk enough about this, and i agree, that the balanced approach i think actually is quite important, that we give equal weight to deviations from both targets, and thats how this is the operating procedure we should be using. Each january, the committee reaffirms the frame work, and so we have the potential every january to make changes. To date, those have been relatively modest. There have been, at least in terms of the overall frame work, its been pretty consistent over time. The main change was to emphasize the fact that we have a similar the rick inflation target. Theres no mechanism equivalent to what the bank of canada does in terms of a fiveyear review, particularly in the context of having a much broader public discussion. So we do have a private discussion at these january meetings. Its a relatively small part of the overall part of the meeting. We certainly dont have an entire Research Agenda over a fiveyear period, and we dont have the extensive Public Comment that the bank of canada goes through. So first, the congressional mandate that we have hasnt changed. So why should we think about a frame work that changes when our dual mandate doesnt . And i think there are a couple of reasons for why we should think about that. We started with inflation target around 2 because it was viewed that it was probably likely to be in the neighborhood of opt natural, and there was a lot of work done both in the United States and abroad, and most Central Banks have pked a target thats very close to 2 . I would say that that research was broadly done at a time where we didnt think we were going to hit the zero lower bound very often, and we didnt think it was going to be hard to get off the zero hour lower bound. So whats new about this at this juncture is that we have been through this period of extended low Interest Rates, not only in the United States, but in europe and in japan as well. We also have different characteristics now than we were having going into the Great Recession. We have very slow productivity growth. We have very slow population growth, aging demographics. All those would tell us that its quite like that will were going to have relatively low real Interest Rates as long as those conditions hold. So, in fact, in our initial frame work, what we kind of thought about inflation being constant with that 2 , you could argue that the opt natural rate of inflation if you think youre going hit the lower bound, depending on whats happening with population demographics and productivity, that the opt natural level of inflation shouldnt necessarily be constant. It should be actually moving around, so its not just the employment part of the mandate that might change over time, it may be that the inflation part of the mandate would change over time. The second reason for thinking about it at this juncture is that well fallen short of our inflation target. So weve been almost every major developed country around the world has missed on their inflation target through much of the last 10 years, undershooting inflation has occurred not because we havent tried to get inflation back up to 2 . There have been very aggressive actions taken in both the United States and at major Central Banks around the world to alter that. Weve had quantitative easing, used a number of other tools that we havent historically used. Despite those best efforts, we havent been able to hit the 2 inflation target. I would say, like john, die expect over the next couple of years we will, but nonetheless, we do have some period of missing for quite an extended period. The third factor we have to think about is fiscal policy. So fiscal policy, rising debt to g. D. P. , gives us less of a buffer in fiscal policy, just like we might have less of a buffer on Monetary Policy. So the potency of nontraditional Monetary Policy, i think weve heard different opinions and different panels today. So theres disagreement about exactly how effective these nontraditional policies are, but i think whats clear is that we certainly didnt get back to full employment and 2 inflation target as quickly as some people had hoped. And the tradeoffs between the goals and the opt him level of the goals may be different over time, so maybe the fomc should be talking about that in a more concrete way. So bank of canada has periodic assessment, and i do think that a Federal Reserveled assessment that thinks about getting a variety of sources to provide us input actually does make a lot of sense. I think it is opportunity to actually think about whether Economic Fundamentals have changed in a significant way. Eke will you be rum Interest Rate is the one that most speakers today have highlighted. But we should think about, what are the best ways to make sure that were satisfying the congressional mandate . And if Economic Fund mentals are changing, we should be factoring that in to say are we meeting the mandate with a frame work that opt naturally tries to address the guidance that congress has given us . So it would be good to have a more standard way to think about whether the frame work should change over time. The bank of canada experience highlights that you dont have to change it very often. In fact, theyve made very few changes. But thinking periodically about the cost and benefits, including the cost of transitioning, which chairman bernanke did talk about quite a bit, and also then, what are the longest run implications . Longer run implications would include how likely is it that wed be hitting the zero lower bound for extended periods of time . So what would we reassess . Well, i think its basically the second panel. There were a number of different proposals that were laid out. So having a more concrete discussion, including getting input from people outside the Federal Reserve, as well as people inside the Federal Reserve, we could think about whether the opt natural inflation rate does change over time, and actually i would argue that we should be thinking more in terms of an inflation range rather than a fixed targetment im not going to go to any length today, because i dont have time, but i will talk about it later this week. But i think there are other ways to think about having a little more flexibility than what we currently have with our inflation target. The process should reflect the unique central bank features. So one of those features is obviously the political economy. That was the topic of the previous panel, at least part of the previously panel. I think the politics are a little bit different in the United States than they are in canada. Canada has a parliamentary system. We have a check and balance system. That may mean that some of the lessons from canada may not translate perfectly. Wed need to focus on structural changes that could reduce the efficacy of the feds policy frame work, but i really think it is important that it doesnt become a partisan exercise. So this should be viewed as a technical exercise. How do we best enforce the mandate congress has given us, not a question of whether were reooflting the congressionally given mandate. That while any kind of significant change should evaluate consultation with congress, and when we were thinking about the 2 inflation target, there was consultation with congress at that time as well. So any change in our frame work i think does require not only a broad discussion, but also a discussion with congress to make it clear that this is what were thinking of doing. My own personal preference would be to conduct a full review like the bank of canada. I dont know whether five years is opt natural, so i think we should give a little thought to having a certain frequency in which you have this discussion. However, i think its also probably useful to have the possibility to call for an earlier review, if you picked longer periods of time. We certainly have learned things from the Great Recession, thinking that we would come up with the exact same policy now that we would have in 2006, given all the things that have transpired over the last decade. It tells me that there are maybe times where you think you should actually have more of a reflection, and that may not actually fit in particularly well with a fiveyear time frame or longer time frame if thats what you picked. However, clearly i think its an approach that there are a variety permanent youre stations that the fomc could consider, but i think the basic idea of a structure discussion, where theres governance around that you actual have the to address these issues, actually is an attribute that i think has quite a bit of value. So my concluding observation, the bank of canada has a process, and as identify gotten older, ive gotten a better appreciation for the fact that having these kind of processes and governance actually does matter. It does give you an opportunity to have discussions that you might not have otherwise. It also is a good way of communicating with the public more broadly about what youre doing, why youre doing it, and also having a Clear Communication about congress about what youre doing and why youre doing it. I think those are incredibly important aspects of central banking. In my own view, the cost of hitting the lower bound for a prolonged period should cause us to at least have a reassessment and at least think about what the implications of that are. We might like the bank of canada and choose not to do anything, but we certainly should be having those discussions. The Great Recession was a big enough event that we certainly should have a period where we reassess and say, how do we make sure that we dont have those kind of events . We certainly did it on supervisory policy. Theres no reason not to reflect back and ask on Monetary Policy, is there anything we should think about differently . So having a process that can fullly and more transparently examine the Monetary Policy frame work, i think that would be a process improvement. So i think john, thank john for his discussion, because i think theres a lot of positive attributes. I think we probably would have to think about how that fit into the u. S. Frame work, both politically and Monetary Policy frame work. But i think it nonetheless is an instructive lesson that we should give some thought to. Thank you very much. Thank you very much. Im going to ask a couple of questions and let the audience weigh in. John, can you just explain a little bit, how does this work in practice . Does the bank of canada come up with and publicize the Research Questions and run them by the government, or how does that get started, and then what happens over the fiveyear period . Thats a good question, david. I tried to give some flavor for that in my presentation. I think its the bank of canada that does the running, the proposal, and for questions to be asked, changes that might be reasonable. We do give the government a little heads up before we come they th our list, just so know. Although theres nothing terribly surprising about that list, that it will be hard for the government to say no, we dont want to you think about any of these things. They might resist, of course, us doing it, but thats different than researching it, asking the questions, trying to do the best thing possible. What has happened through time i guess as we thought of initially, one and done, and then we know forever, quotes, what the rates should be. That actually continued for two or three renewals where we always thought oh, the next one is going to tell us that another five years experience, helping us test the waters, see whats happening, then well know. Anyway, by about 2001 well, views changed and recognition was given at that point there may be some benefit to that repeated exercise and something we take more seriously and something we map out quite carefully as weve indicated. Its not that we spend the whole five years looking at nothing but the inflation target renewal but it provides a roadmap for our research and other people who we hope will join us. The questions are made public in the beginning . Oh, yeah. And the discussion and papers are public. Theres a website set up. Does anybody Pay Attention . I didnt usually i mean what i say but this time i didnt. Do you get attention from the press or markets or is it like jackson hole or its not like jackson hole. Ere canada. We do have good economic reporters in canada, and they watch what we do and what we ay very carefully. And i think its been suggested the public at large doesnt live and breathe inflation targeting and if it should be opinion setters i think do watch and it matters. Ill ask you two questions. One is, is there some institutional inertia that prevents the fed from doing what the bank of canada does or is it a fear of what the markets might say or is it just maybe the time wasnt right and now it is . Whats your sense . Theres nothing that prevents us from doing it so any one of those january meetings could actually be doing exactly what the bank of canada does, so theres nothing institutionally that prevents us from doing it. When you dont have a regularized process, theres a lot of inertia in any bureaucracy and dont think the central bank is any different than any other governmental or in many business organizations that this is a process that actually is forcing a discussion and it hasnt been our tradition and didnt start out as a tradition at the bank of canada either it doesnt sound like. So i think its more youre certainly in the middle of the crisis thats been highlighted and would be a difficult time to be talking about completely changing your framework. Theres so many other things youre worried about and it would be very difficult to tell the public why youre doing it in the middle of a crisis. I do think once youre out of the crisis you have a little bit more perspective and easier to have that discussion. I think the idea when youre close to full employment and close to your 2 inflation target isnt a bad time to be reflecting so i think one reason for you having this conference is weve had enough time to develop to say that maybe we need to think about Monetary Policy and fiscal policy and buffers in a more coherent fashion and i think there is an opportunity to do it if there was willingness to do something. Ill read your speech later in the week but want to understand what youre talking about, youre suggesting instead of saying we have a 2 inflation target we have a range of 1 1 2 to 2 1 2, how does it make things better . Like you can decide we want to be a little higher or lower or what . Lets say you took an inflation range of 1 1 2 to 3 , if youre in a period of high productivity and population growth, then you probably dont have to worry about hitting the zero lower bound as much and would be lower in that range. If in a period where the labor force is going very slowly and productivity is very weak so youre worried about hitting the zero lower bound, its much more likely in the next recession, then you might choose to be higher in that inflation range so it gives you more flexibility to say the opt mall inflation rate isnt fixed over im and if you picked a range of 1. 5 to 3 , its not like picking a 4 to 5 which is the numbers some have picked. So if you think the population growth and immigration and productivity are going to stay constant you wouldnt make any changes but if youre in a world where those things can change and sometimes do change then saying that having the exact same inflation rate regardless whats happening with productivity, regardless whats happening with population growth and regardless whats happening with immigration, theres enough fixing of the inflation rate youre going to get a suboptimal result. So having a little more wiggle room to think about what the optimal inflation rate is for that time, without having it so wide you have to worry about is different than would you then disclose you think were headed towards the high end or low end, is that the objective . Were still following the dual mandate but have a range that well factor in a little bit more about what is the likelihood we hit the zero lower bound so there is a cost we hit the zero lower bound frequently and very hard like Larry Summers did discuss and i do think were in an environment right now where were likely to have fairly low Interest Rates so havent talked a lot what the costs are, larry gave some numbers. I do think Monetary Policy effectiveness at the zero lower bound is not nearly as we cant get out of that situation as easily as weve thought and in fact the fact neither europe nor japan have gotten out of that situation yet indicates how difficult it can actually be so i think we have to take that and think a little bit about what does it mean if once you hit the zero lower bound, you may be there for a prolonged period. And what does a prolonged period of low Interest Rates mean . There are incremental quality issues and a difference between savers and investors and lots of things you have to think about in terms of Financial Stability if you have long periods of very low Interest Rates. I think factoring those in should give you a little bit more flexibility in your Monetary Policy framework than what we currently have. Thank you. Peter . Go to the mike. Whereas the bank of canada is with the ministry of finance, with the u. S. Case it would be with congress. One question. The other question is for both panelists, what are the significant costs of inflation at 3 versus 1. 5 or 2 . I wont be very original, so instead of repeating some of the arguments that have been laid out early on, some of it relates to equity being fair to people and not having arbitrary redistributions of income and you know a large part of the inflation is regressive, that those lay stable to protect themselves off in the forest have a more difficult time than those that can accommodate it more easily. And some of it, a lot of it is efficiency arguments that while there isnt a big difference, admittedly between 2 and 3 and 2 and 4 but in terms of what it does looking ahead, its enormous. A lot of people dont realize even with 2 inflation, price levels double every 35 years. And for many people, that kind of corresponds to their retirement period. So youve got more uncertainty about the economic environment whereas something closer to ice stability employs provides more certainty and contributes to the margin to better planning and decisionmaking than you would have otherwise. Its an equity sufficiency, surely things would work better notion. I dont know if that answers the question. I think thats where a lot of some of us would still be. There are offsets to that and those were mentioned, the bias in the major, hitting the effective lower bound. In a range of 1. 5 to 3 . I dont think most people are going to notice p. So weve been undershooting for most of the last five years. If wed exactly hit 2 do i think the world would be dramatically different . Probably not. So i wouldnt want to pick a range thats much higher but i do think in that range, it would be hard to argue there would be dig bies between a 1. 5 and a 2 and 2. 5 . But what if i hit the lower bound maybe at 1. 5 or 2. 5 depending on what else is happening in the world. If im in a world where the labor force is growing slowly and we have low productivity and im picking a number of 1. 5 , well, as larry said, youre going to now have an Interest Rate thats going to be not high enough the next time you have a recession youre almost certainly going to hit the zero lower bound. So thinking about if frequently we have to drop Interest Rates by 400 or 500 basis points but dont have enough inflation to get to that level before the next recession hits, i think theres an issue how frequently you want to be in that situation. Do you anticipate a role for congress in this canadian style review . I wouldnt argue necessarily for exactly the canada style review but do think the Federal Reserve could have a broader discussion about our framework and why we think the current framework is the appropriate framework and i think as part of that there should be public questions that would be shared publicly, including with congress, in that if we were to decide the framework there would have to be consultations with the various banking committees and talk about this, that weve had a lot of studies and why our interpretation of dual mandate is were not following it optimally with the current framework. So i do very much agree to a careful framework review would an good thing at this point but also comes out from the discussion how different the political economy context is and the governance context and there are clearly some risks involved in a higher profile, more open, more politically engaged process here that may not exist in canada or at least not to the same degree. So i just wanted to press particularly eric, what is it that we cannot achieve by simply interpreting the existing symmetric inflation target more aggressively . Let me start with i think there are costs to having a review and there are risks that instead of being a technical discussion it becomes a partisan, political discussion. Seems like bank of canada gives us an example but that doesnt necessarily have to happen. I do think there are also costs to having the wrong framework and those costs are ones Larry Summers and others this afternoon discussed. So i think there are other ways that you can broaden it out so just the example of taking an average over a longer period of time has some attributes to that but do think it does help to actually talk about it in a public way and communicate it clearly and whatever your framework is will make a difference for policy. If im picking a five year average or one year average or only looking forward, im going to have a different policy prescription. So when im thinking about my Monetary Policy and what Interest Rates is optimal its within the framework we adopted in january so if we had a price level target now i would not be recognizing the same Monetary Policy prescription as the current framework that we have o to the earlier question that christian was talking about it makes a difference because our policy path would be different depending on which framework we picked. How much risk youre willing to take with inflation being above 2 or above 2 for an extended period of time would depend which framework you thought was the most appropriate. Its great to have agreement with the committee and more broadly with congress and the public more generally about what the framework should be and then its our responsibility to follow that framework even if its not the framework i personally would pick. One of the measures of a conference like this is that ive learned since ive come to brookings is afterwards people ask you, so what did you learn . And usually i have to think about this for a while afterwards to decide, but i think one of the things ive learned today is that there are moments at which asking questions like this feel really appropriate. And this certainly seems to be such an appropriate moment. I want to thank the large number of people who arts pate participated today and we hope to synthesize it because i have a theory as ben better than aingey suggested earlier it would be a conversation ongoing and perhaps with increasing volume the next year or so and i would like to thank he Hutchinson Center staff and vivien leigh and mike ing for helping put it together and mike did a nice explainer of these issue which is is on our website and i want to thank all of you, particularly the people who sat here over four hours to talk about monetary frameworks, youre my hero. [captions Copyright National cable satellite corp. 2017] [captions Copyright National cable satellite corp. 2018] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. Visit ncicap. Org] earlier in the day, former Federal Reserve chair ben bernanke spoke about how Monetary Policy can respond to the next recession. Heres a look. Now im going to put this all in context. So first, thanks to david wessel and the Hutchins Center for organizing this. I first agree entirely with larry summer initial comment about thinking how monetary response to the next recession is very important. I know the Federal Reserve, we can tell from the minutes or speeches theyre thinking about it and as i strongly support the general efforts to do that. I think as we do that we have to keep in mind like the joke how do you get to temporary . Were not starting from here. We dont start with a blank state. We have a system of framework, 2 target in which theres a tremendous amount of investment and years of communication and experience and anchoring expectations around the inflation target. So i think the argument that says well, what do we do . We start from scratch. Its interesting for academics and maybe not the most relevant question, starting where we are, most particular it may be the case the optimal inflation target may be higher than 2 given what we know now but if its 2. 2 , it doesnt adjust the framework. We have fixed costs and looking forward we think of the benefits of changing and also if we go to a new approach, suppose and it could happen in 10 years that nominal Interest Rates, the people with real Interest Rates should be higher and Artificial Intelligence will start having the benefits we are hope for if it doesnt lock us into a inflation market in perpetuity, how do we respond to the next change in environment . Well hear from bank of account about their fiveyear process of reviewing but i notice which is very good and gotten phrase from american policymakers they havent changed their framework, it is costly, so you need to make that case very strong. In terms of the individual approaches that have been suggested, i think the one that ill just make a bold prediction, the Federal Reserve will not adopt a 4 inflation target. Its not going to happen. From a theoretical perspective, first of all, its been shown its an inefficient way to deal with the problem and inefficient because it gives you high inflation all the time. Whether youre close to the zero lower bound or give you any additional push to get out of that situation. Its not a very efficient approach. Thats the theoretical objection. The political objection is that , you know, the u. S. Public is not going to be very open to a 4 or 5 inflation target and in particular i do worry that the people pushing this, so many of them are pro expansionists and they might find if they open this up too much theyll end up with a change in the law that eliminates the Employment Costs rather than reasserts the price stability goal rather than what theyre hoping for. In terms of the options on the table, my own preference a at least tentatively like John Williams, is to look at a variance of price leveling and it has the advantage of maintaining place stability and the lower variance over time, we have more information where inflation and prices will be in 10 years under a price level target than an inflation target. And in many ways similar to the current framework and talk about average inflation rates over a period rather than inflation period by period. I do think that there are problems associated with undoing price shocks away from zero bounds and you can do core inflation, thats true. My own preference as has been ashrewded to would be to apply this primarily at the zero lower bound, specifically when theres a deficit of inflation over a period Interest Rates are at or close to zero, that deficit becomes an additional input to policy debate and policy discussion which leads all else equal to a tendency to overshoot inflation coming out of the zero lower bound. To the extent that is anticipated, understood in advance, that gives you greater policy stimulus and greater impact even going into the zero low bound period. One objection, a generic objection to changes in inflation target is well, we dont really believe we can change expectation and get people to believe some kind of different policy process. I realize it is difficult, weve seen for example in the case of japan its hard to get expectations changed which of course is the reason any change from the Current System will be complicated but with the price level targeting and temporary price leveling targets, the focus is not to get the person in the street the higher inflation out of a recession but the main interest is the Financial Markets and weve seen from the recent experience that when the fed announces theyll keep rates lower longer, the bond market reacts to that. It may not be something that the average person or firm will respond to but if the bond market responds to it, you get additional policy stimulus, i think it could be effective. On g. D. P. Targeting, first of all, reject two arguments and explain why i think its still worth talking about. One argument we heard from larry is that if you raise your g. D. P. Target it will disguise the fact youre raising the inflation target and wont work and people will notice that. The second argument i think came from jeff that he compared not only g. D. P. Targeting to rigid or strict inflation targeting, in fact inflation targeting is, quote, flexible which means as stated in the feds policy principles, the time it takes to return to the inflation target depends on the state of the economy. So in fact inflation targeting can accommodate a supply shock and you look through the temporary supply shock as you move back to target. Now, i think the reason the g. D. P. Targeting is worth looking at, despite the differences in appearance is actually very similar to price level targeting as john meetingsed. In particular, let me make the comparison, growth levels, targeting of the nominal g. D. P. Growth rate is similar to inflation targeting and targeting the levels of nominal g. D. P. Is similar to price leveling charging. Let me talk about the relationship between growth targeting and inflation targeting. Targeting nominal g. D. P. Growth is targeting the sum of real growth and inflation so its ke effectual inflation targeting because youre targeting inflation but looking at g. D. P. Growth and allowing for easier policy when g. D. P. Is below trend and tighter policy above trend. What are the advantages and disadvantages of g. D. P. One target thats made is it requires less information and you dont need to know the natural rate of unemployment to do a nominal g. D. P. But on the other hand you need to know the nominal g. D. P. Target and thats a balance you have to make. Another argument is nominal g. D. P. Targeting is less judgmental in the sense that is sort of builds in your flexible response is to change it in g. D. P. And then its not clear how the fed would respond but depends on the cost benefits. One interesting aspect of nominal g. D. P. Targeting is as i mentioned, larry mentioned, if you have a 6 nominal g. D. P. Target and potential g. D. P. Growth goes to two it raises your target to four. To the extent nominal Interest Rates and g. D. P. Growth have a way to offset the low nominal rates. The one problem is you could get in a situation of very low growth and then the fed would be targeting high inflation and may not be possible or sustainable. My bottom line is of the various things suggested, i think that variance of price level targeting is the most appealing to me. I recognize and would recommend to the fed to look at nominal g. D. P. Figures because theyre letted to the price level targeting. In what i consider to be minimum requirement at this point, you could make the case, making this hypothetical case, not saying its correct but make the case with the cost of changing and i think larry may have overstated a bit the severity, the cost of the zero low bound where it is and make a couple points on that. One is its been pointed out in the paper by people here at brookings the Unemployment Rate came down as quickly as porme. So if thats your case of slack, they did get it down given how deep the recession was. You know, moreover, despite the fact that, you know, people think it may not occur again, long term estimates of inflations from swapened and so on is close to 2 . This is suggesting the markets dont expect long periods of low inflation because of the zero lower bound. So maybe what im arguing is that main the situation in the current status quo isnt as dire as was portrayed and indeed the other argument i would make is weve learned a lot from the recent experience not only in the United States but europe and elsewhere how to use unconventional policies and how to signal more effectively and how to coordinate q. E. And signaling, etc. Say for the sake of argument the fed decides given the cost of transition none of these alternatives of helping and they should add to their policy of statement policies and principles, a statement how they attack the next lower bound period and be explicit in general terms how they would use forward guidance, quantitative easing and what combination and under what criteria to provide not only clarity but to be affected and one of the benefits of the framework is markets anticipate how the fed will react even before you hit the zero lower bound and possibly if the fed laid out in some form or way how they intend to respond to the next lower bound and you might have a possibility of hitting the zee low low bound lower. Thanks. Sunday on cspans q a and author and wall street contributor a. J. Bane with his book the accidental president. And the four months that changed the world. Roosevelts tournament was saturday and sunday. Truman was terrified to give the speech. He talked about it and the night before elate in his bed and spoke to god and asked he hopes he doesnt mess it up. Then he climbs the stairs and sees his wife in the crowd crying and hes crying because roosevelt is dead. The nation is in shock and she never wanted to be the first lady. She never wanted her husband to be president. Shes frightened, frightened for him. Meanwhile, he has to get up there and inspire confidence in his administration and the whole world has to understand that america will continue, that the war will continue. X a sunday night at 8 00 eastern on cspan. The deadline for cspan student cam 2018 video documentary competition is right around the corner. Its january 18. Were asking students to choose a provision of the u. S. Institution and create a video illustrating why its important to you. Students across the country are in the final stretch and sharing their experience with us through twitter. These students participated in a student cam film festival. This group wrapped up an interview on Climate Change and this student is learning a lot and having fun while editing. Our competition is open to all middle school and high school students, grades 612. 100,000 will be awarded in cash prizes and the grand prize will go to the student or team with the best overall entry. Go to our website at studentcam. Org. Coming up live on the cspan networks. The u. S. House returns for general speeches at 1507b8g and Homeland Security bills at noon. The Senate Continues work on judicial nominations at 10 00. M. And on cspan 3, with alex azar, the nominee to be h. H. S. Secretary testifies at a confirmation hearing at 1507b8g and Washington State governor jay inslee delivers his state of the state address at 3 00 p. M. We talk about whats ahead for he second session of the 115th congress. Sheldon white house of ready. Congressman bill johnson, republican from ohio. We talk to Florida Democratic representative Wasserman Schultz and john boozman. And david brat here at 9 00 and at 9 20, from a democrat from entucky. [captions Copyright National cable satellite corp. 2016]] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. Isit ncicap. Org] host good morning. Its tuesday, january 9, 2018. The house and senate are both scheduled to return at 10 00 a. M. With votes set for later in the afternoon in the senate. Vice president mike pence expected on capitol hill when he attends the weekly Senate Republican policy lunch meeting. And this morning, well be with you for the next three hours on the washington journal. Well spend most of our program talking about congresss looming Government Spending deadlines and the key issues to avoid a government shutdown. And a big debate is the future of u. S. Immigration policy and the fate