Roundtable Discussion Academic Help Wanted: A Policymaker s Perspective. Athanasios Orphanides Board of Governors of the Federal Reserve System

Transcription

1 Roundtable Discussion Academic Help Wanted: A Policymaker s Perspective Athanasios Orphanides Board of Governors of the Federal Reserve System The MIT Central Bank Research Network 2006 Fall Conference Cambridge, MA, December 4-5, 2006 The opinions expressed are those of the author and do not necessarily reflect the views of the Board of Governors of the Federal Reserve System.

2 Limited Knowledge Identifying current state of economy. Data measurement. Real-time information and data revisions Mismeasurement of aggregate price indexes/components Mismeasurement of economic activity and components Unobserved equilibrium or natural rate concepts and gaps The natural rate of interest The natural rate of unemployment Trend productivity The level and growth rate of potential output The equilibrium real exchange rate Equilibrium values for housing, equity prices, risk premia, etc. 2

3 Structural Change and Imbalances Detecting structural change For example, questions on inflation dynamics: Intrinsic persistence in inflation Pass-through of exchange rate movements Slope of Phillips curve (technology? labor markets? globalization? expectations?) Identifying temporary vs persistent change In additive shocks in the structure of the economy In deeper parameters (e.g. slope coefficients/multipliers) Imbalances Definitions (real-time vs ex post) Measurement Uncertainty/disagreement in measurement 3

4 Issues with Real-Time Data in Modeling Real-time information/data revisions too often ignored both in model estimation and model evaluation. In the past, lack of data was cited for this practice. But historical vintages of real-time data are now widely available. (Numerous CBs already make real-time databases available on line, e.g. FRB Philadelphia and FRB St Louis for U.S. data.) Effect on model fit. Effect on forecast evaluations. Effect on estimation of structural equations with expectations. Pitfalls of assuming expectations are based on data values reported after expectations are assumed to be formed. 4

5 Dealing with Uncertainty A pervasive tension in modeling: simplicity vs robustness Risk Management: Moving beyond certainty equivalence Assuming more knowledge than is available (e.g. by ignoring various aspects of uncertainty on model and unobserved latent variables) can yield sharper conclusions on optimal policy. But too often, adopting the suggested optimal policies is found to lead to first-order losses once simplifying assumptions are relaxed. How can policy protect against such pseudo-optimality policy prescriptions? Should policy discussions start from simple robust rules or pseudooptimal policies implied by simple models? 5

6 Expectations Determinants and measurement. Treatment of heterogeneity: Households/businesses/financial market participants. Analysis of disagreement/uncertainty. Learning, cognitive limits, memory, computation, heuristics. How do economic agents process new information to update their beliefs and form expectations? What is the role of policy design and communications in facilitating expectations formation (especially regarding inflation)? How should policy use the available measures of expectations? 6

7 Communications Interactions of policy actions, CB communications, learning, and expectations formation. How does evaluation of alternative strategies depend on these interactions? Is it better to focus communications on few elements the CB can be more informative about? What is best way to communicate uncertainty and conditionality of forecasts? In committee settings, what is best way to communicate possible differences of opinion, disagreement? 7

8 Financial System Develop theoretical and empirical models of the nature of systemic risk in the financial system and how such risk can be transmitted to the real economy. Develop theoretical and empirical models for assessing and integrating a financial institution s total risk, and deriving a coherent solvency standard. Develop theoretical and empirical models of the determinants of liquidity in financial markets. Develop theoretical and empirical models of competition in a consolidating financial system characterized by rapid technological change in the production of financial services and the blurring of traditional distinctions among products and services (e.g. banking and commerce). 8