Or conversation from the Brookings Institution on Monetary Policy and inflation continues. Coming up, well hear from former fed chair ben bernanke and New York Times columnist and author paul krugman. Thank you all for continuing the conversation. Its almost hard to believe theres anything left to say after those panels. So i was going to propose that we do this whole thing in rap or maybe in finnish, but i thought that was a little unfair given that i havent given the panel advanced warning of that. Thats right. Also, you wouldnt want to hear me. So i am joined here by Olivia Blanchard formerly of the International Monetary fund and m. I. T. Loretta midwe loretta mester, and ben bernanke, and our colleague gary brookings and paul krugman, the economist at the university of new york. Columnist for the New York Times, krugman is the guy that makes all journalists nervous because he seems to be more productive than the rest of us and thats kind of frightening given that he does all of these other things on the side, but we can discuss that later. So i wanted to start by asking each of the panelists a bit of what they took away from the conversation we had this morning. I want to start with olivier who makes the observation in the slide that you see behind us about thats been made about how the wage phillips curve behaves perhaps as one might have expected, but prices arent rising and so the question is what the hell is going on . Okay. So i had prepared a slide in anticipation, and i think it has survived the proofioevious thre hours very well, and what implications it has and the diagram on the which side is it, and it started in familiar form and it is in the Unemployment Rate and the rate of inflation measured by the employment cost index and you can plot it in a scattered diagram, but its there and its consistent with everything weve heard. What people have put on the righthand side typically is the phillips curve. What ive done instead is plugged the Wage Inflation using the employment cost index which is the blue line and the gdp price which for the purposes of thinking about markups is clearly much better value than the cpi and this is what we produce and basically, its visually striking which is that although we saw from the previous graph that the Wage Inflation was kind of okay. The philips curve was okay and there doesnt seem to be much of a violation with the gdp price deflator and the employment cost index and its the disconnect. People have talked about the its true. Theres a lot of variation that that in the price index which is not coming from the cost index. These two dimensions. So starting there, my reactions today, so i think the first puzzle is the slope of a relation between Wage Inflation and unemployment and on this, i think, were not clear as to where the slope has really declined or not. My sense from our own regressions is that it has, but somebody argued that if you do it right it has remained more or less the same. I think it has decreased. And with the explanation, i think, is a very plausible candidate and subject to the test that i suggested, and it seems to work. The other is that maybe there has been a change in the bargaining structure on wages and basically, we think of targeting the splitting the rents from the match. Well, if the workers are already at the bottom end, theres nothing that could be done and if anyone was paid the minimum wage and there was no effect on unemployment and wages. I think that Something Like this is happening, but i dont think we solved that one and we need to do it. On the markup and the second graph, is it what is it . Whats going on . I suspect measurement was a big part of it and the more you know about the gdp deflator the more you worry, but weve heard various explanations on pricing and some sectors really have to take the International Prices given and therefore you will not see the kind of passthrough and thats not throughfold and we need to take the way it was down for labor and try to understand it. Theres still work to be done. On the past implications which is the theme of the panel, this actually, and the stability of the wage phillips curve and the instability for the price phillips curve has a fairly big implication which hasnt been examined and it should have been in the context of thinking what the fed should do is have the Price Inflation target. It clearly is much more related to labor market development. So from just the point of view, it seems a better measure to look at, but from the nomative point of view and the markups have distortions and it doesnt have a mockup in it namely the wages and when you see Wage Inflation at 3 and you see productivity off at 1 then youre home. Even if the gdp deflator in my case and the cpi and the core cpi moves around. So we had talked over dinner with janet and we said we would write a paper together. Janet has been a bit busy, but i think that is still worth exploring. Also, politically, actually, telling people that the fed cares about wages and has Wage Inflation as a target is probably a plus. Does that mean youll be tightening now because wages are rising . I would think its more or less with employment and Wage Inflation is about free something and productivity is a 11 and thats consistent with the price level correctly measured for about two. Yeah. Im more on the hawkish side these days. Oh, my goodness, than jared. Lorena mester. Ive noticed in a number of your presentations over the recent months you you have a lot of things and if its the case that the nonmonetary factors are holding back with measured inflation and there its thats a different implication for policy than if its an aggregate demand shortfall. Im sort of curious. What sense do you make of all of this evidence that youve heard this morning and whats driving inflation with the work weve done and the work youve done with the cleveland fed. What explanations have you bought, and h. L. Menkin is from baltimore and he had a line that said for every problem, there is a simple, elegant solution thats wrong. I dont think there is a simple oneword answer in understanding dynamics and if you look at structural part of inflation that is related to the labor market and the acyclical part and the structural part and theyre prices that usually move. With the tightness. And the acyclical are things like health care. Health care which is the big part of it and other parts that arent really related and the cyclical part is only 40 , right, of inflation now. And the idiosyncratic factors that affect the labor market and affect the inflation rates and its not just the labor market and the tightness with the labor market, but if you do just look at the cyclical part it certainly is correlated with tightness in the labor market. So i believe there is still this relationship and that we can use it to help predict inflation. That said, you have to recognize that there are these acyclical factors affecting measured inflation, and so i think you want to be careful about sort of trying to explain everything thats going on in the labor market. So that means if you see a shot and it may take longer to get back to the inflation target that would otherwise with the Communications Point of view and you may want to be thinking about a range as opposed to a point target because you have these shots that will move inflation off of your target even if your trend inflation rate is moving up. So there are implications for how you think about how you communicate your target and i think the results we saw today with the Inflation Expectations are provocative and it makes you think about a different way of communicating and a different way of thinking about the interplay between Inflation Expectations and your target. So from my point of view, you may have shocks that move inflation off the trend and the trend underlying inflation rate will be to remind Inflation Expectations and so i agree with the remark that janet made in the beginning that the stability of Inflation Expectations is key to allow you to run your Monetary Policy. I think the results that talked about the Amazon Effect and the fact that pricing models are changing are very interesting because if its true that prices are becoming more flexible, and if you think about the dsg model and its because of sticky prices. If prices become less sticky because theres more frequent price changes, that means Monetary Policy is less effective or said differently, you have to move your rate more to have a similar effect. So again, right, these changes, these underlying structural changes are more important than just how do you measure inflation . They may actually change the transition mechanism of Monetary Policy. Ben, are you confirmed that somethings changed or with some accident of history weve had wise Monetary Policymakers as sylvana points out and everything is the same and the only thing thats change side the quality of Monetary Policy . [ laughter ] i think the most important factor over the long haul has been changing not wiser Monetary Policy and a Monetary Policy anchored on Inflation Expectations and if john watson and kim stock studied the dynamics of inflation showing the unobserved components model and the basic message was that 30 or 40 years ago if there was a shot to inflation and the significant part of that shot was permanent and it would stay away from its initial point whereas since the 90s if theres a shot to inflation its transitory and that goes back to the underlying level and Inflation Expectations have been well anchored and so shots to inflation tend to be transitory as long as the policy is consistent with that. That is, by the way, the policy and its complimentary and Inflation Expectations are well anchored and they can relatively succeed in keeping them at target and vice versa, if policies are keeping Inflation Expectations and they tend to be well anchored and that explains the broad changes in the inflation process, and probably helps at least to a first instance explain their most recent behavior. Part of the reason why inflation didnt fall so much in the recession was because Inflation Expectations were well anchored on the down side. They probably did fall some extent and weve seen some evidence that Inflation Expectation fell which is part of the reason that inflation has been slow to come up. Having said that there are interesting points made today, for example, clearly, part of the reason that inflation has been slow to come up is that the fed underestimated how far the labor market could be pushed along with what eric talks about and you start and unemployment is lower than the fed thought a couple of weeks ago. Some of the points that kristen made that kept inflation from falling so much after the panic and the transmission of the process. In any short period there will be a bunch of idiosyncratic and other, the change and the structure monetary policies and the most important thing and all of these other things obviously are relevant, too. Paul, what sense do you make of all this . Yeah. And we basically understand the economy a lot less well than we thought it did which has a huge bearing on policy. I actually wanted to Say Something about oliviers proposal because i i have thought something along the same lines and then kind of backed off it even though the economics seem to be totally right and heres the point. Talking about targeting wagees. Targeting wages. Theres one thing, and nobody really talked about it here, but one huge Success Story for conventional monitory analysis has been the distinction between core and headline inflation ben remembers this better than i do, and we remember 2010, 2011 when headline inflation was going up mostly because of oil prices and the fed was saying calm down, its core inflation that we should be looking at and was totally vindicated in that, but we are now seeing that theres some stuff going on even with the core inflation measuring, but if we think about conceptually what we mean by core, we mean stuff that is sticket and coreiest at the core is Wage Inflation, and it makes sense to say lets target inflation and were trying to target the fed because were saying wages are rising too fast. It will be disastrous. We are committed to make sure that wages increase no matter what at 3 a year. Maybe. I think weve its not just 40 of fin, but a large proportion just doesnt get messages that are complicated. Your body language suggests that youre not ready to endorse the blanchard rule. I was just having the exactly same reaction that paul did. I wouldnt want to sit in front of congress to say were concerned that wages are rising too quickly. Thats thats a concern. I think its a complicated question. I mean, theres elements of the price process which are independent of labor markets, and that they need to factor into the Monetary Policy, as well. It seems at the same time that a long period of below target inflation in many countries around the world and weve seen the natural rate of interest that will prevail when all is calm when its been pointed out that we dont know what it is, but theres certainly widespread consensus that its fallen a lot and im sort of wondering, it seems to me two questions. One is are these things related and secondly, this is kind of challenging. How is it how should monetary approximately s policy think about a word when inflation for now seems to be persistently low and the natural rate of interest seems to have fallen and is also persistently low. I have as you might guess, a somewhat facetious answer to the most part. It looks like you star and our star, and its things exist which were not sure about that and both of them have fallen and why has the star gone down . The answer is we really dont know . We really dont know so the common factor is both ever them are caused by we really dont know. [ laughter ] i thought the catchall answer is it has something to do with demography. Thats the next thing, if i had to make up a story i would say demography. You can make a story look those lines and the fact that it is holding up better it makes it harder to tell the demographic story. If it was more just a more experienced, older workforce that should be showing up in the wage phillips curve which is the less dramatic part of the story, but i buy the demography on the stagnation story, and i think thats right, but whald take from it is the general policy lesson and its quite possible theres a lot of slack in the advanced as a whole and at the same time there is very little monetary space in the world as a whole which should give us a lot of anxiety. We should be worrying a lot because if were in this situation now when nothing really bad has happened lately, we are in big trouble if sooner or later something really bad will happen and the two factors together mean that we should be worrying a lot about what can we do to give us more space about policy response which will get us to some of the other questions that you gave us about inflation targeting and fiscal policy. Can i go back to the allstar, youth star conundrum . I think its a bit worse than we dont know. Right. All right. Because my explanation is the Bargaining Power workers it seems fundamentally, and that needs to be on the profit side and the risky are. So in that light, which is fair is even more of a puzzle. Great. So loretta unfortunately, you have to make decisions without the information. We always have to make decisions. I guess im going to push back a little bit on the fact that we have all of the slack still out there is if you talk to firms and we had a panel that went yesterday at the cleveland fed. They routinely tell us and this has been going on for several years about the difficulty of finding workers, that they can hire. You push back on them and they say okay, are you raising wages . Theyll say yes, but thats changing now. Now theyre basically saying that its not really worth trying to hire the pool thats still out there because when they do bring them in they dont stay on staff more than a month. So i say do you know where theyre going . They have no idea. Its not for other wages, but what is the response now . The response now is theyll start automating more and youve seen that in all these firms. So i think, you know, i would say that we have done a lot in terms of running policy much more accommodative than we would have in the past. Partly thats because we brought down our estimates and, jarrod, if you if someone were going to say relative to the old view star we are running the economy very high and our policy is much more accommodative than it would be on an old traditional taylor rule. So in that sense, i think weve taken yn board some of the things that we talked about in terms of we had to rethink when we dont see wages going up and we have to rethink our policy rule and i think weve done that b ought some point there are unintended consequences of doing a policy like that, and so you may be ending up affecting long Term Employment growth because if you automate the firms your demand for labor is high. Im very sympathetic to wanting to be at maximum employment. Thats certainly our goal. Its policy with the Monetary Policy isnt really going to affect the overall labor market and the way that you want to. I think the things you pointed out in terms of the things that we talk about when we go out