Transcript Presentation - Federal Reserve Bank of Dallas

John Taylor’s Contributions to Monetary Theory and Policy
Federal Reserve Bank of Dallas, October 12-13, 2007
Comments on “Globalization and Monetary Policy”
Prakash Loungani
IMF
• Thanks for inputs from Doug Laxton, Michael Kumhof & Alasdair
Scott at IMF and from John Taylor. They are not to be blamed for
any mis-use on my part of these inputs.
• Views are my own and should not be attributed to the IMF.
Story line and conclusions
• Taylor: a multilateralist driven to isolationism by the evidence
– Carlozzi and Taylor (1985); Taylor (EER 1985)
– Work on multi-country models
• Bullard & Singh paper
– Interesting, but doesn’t change my view of the world … yet
– And particularly because “benchmark” DSGE models seem to offer reasonable
view of the world
• Clarida paper
– CGG made easy; nice exposition
– But does it deliver a practical open economy Taylor rule for policy use?
• Globalization and Monetary Policy: Empirical Evidence
– Globalization’s impact on the Phillips Curve: “strong” evidence (hint: it’s based on
my own work)
– Globalization and the Monetary Transmission Mechanism: still quite mixed, but
evidence is pushing in direction of stronger role for open economy factors
Carlozzi and Taylor (1985): studied coordination in 2-country model
Carlozzi and Taylor (1985): found small gains from coordination
Figure 1: Inflation and Output Growth Variablity
7
IT
1966-83
UK
Standard Deviation of CPI Inflation
6
5
JA
4
FR
US
3
CA
2
GR
1
UK
FR
US CA
GR
IT JA
1999-2006
0
0
1
2
3
4
5
Standard Deviation of Year-on-Year Output Growth
6
7
Figure 2: Inflation and Long-Term Interest Rate Variablity
7
IT
Standard Deviation of CPI Inflation
6
UK
5
JA
4
FR
US
3
CA
2
GR
1
CA
US
UK
GR
FR
JA
IT
1966-83
1999-2006
0
0
1
2
3
4
Standard Deviation of Long-Term Interest Rate
5
6
7
Figure 3. U.S. Inflation and Output Volatility:
Data and Model-Based Results
(Percent)
A: Actual 1966–83
3.5
2.5
EF1: 1966–83
2.0
EF2: 1984–2006
1.5
B: Actual
1984–2006
1.0
0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Standard deviation of output
Sources: Haver Analytics; and IMF staff calculations.
0.0
3.5
Standard deviation of inflation
3.0
More open economies have flatter Phillips curves (1)
Phillips curve tradeoff
Lucas's estimated Phillips curve tradeoffs (AER '73)
and capital mobility
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0
0.1
0.2
0.3
0.4
0.5
0.6
Index of restrictions on capital mobility
Source: Loungani, Razin and Yuen, Journal of Development Economics, 2001
More open economies have flatter Phillips curves (2)
Ball-Mankiw-Romer Estimates
of Output-Inflation Tradeoff
Index of restrictions on capital mobility
0.8
0.4
0.6
0.3
0.4
0.2
0.1
0.2
0
0
I
II
III
IV
I
II
III
IV
Source: Loungani, Razin and Yuen, Journal of Development Economics, 2001
More open economies have flatter Phillips curves (3)
Sacrifice ratios and openness
4.5
4
3.5
R2 = 0.2598
openness
3
2.5
2
1.5
1
0.5
0
0
0.5
1
1.5
2
sacrifice ratios
2.5
3
3.5
4
Globalization and Monetary Transmission Mechanism (1): Mishkin 2007
• What explains the decline in the sensitivity of inflation to
domestic output gaps (i.e. flatter Phillips curves)?
– Channels: domestic prices less responsive to domestic resource
utlization because of access to cheaper imports or lower likelihood
of hitting up against supply bottlenecks. Little evidence in favor of
these channels (Ihrig et al 2007; Wynne and Kersting 2007)
– Anchoring of long-term expectations: households and firms less
likely to push for wage and price increases in face of rise in
resource utilization (Mishkin 2007)
Globalization and Monetary Transmission Mechanism (2): Mishkin 2007
• Are foreign output gaps more important in domestic
inflation?
– Borio and Filardo 2007 suggest foreign slack more important than
domestic slack in explaining domestic inflation. But this conclusion
is challenged in other studies
• Is transmission of monetary policy through exchange rates
becoming more potent?
– Shocks to domestic demand have smaller impact on output in more
open economies because of offsetting movements in the trade
balance (Guerrieri, Gust and Lopez-Salido 2007)
– Declining correlations between real GDP growth and real domestic
demand growth (Ihrig et al 2007)
Conclusions
• “Closed economy Taylor rule” has served us well for well
over a decade
• Competition for a winning “open economy Taylor rule” is
still on
– CGG and Clarida paper offer useful theoretical leads
– Coordination and indeterminacy are challenging complications
• “globalization has helped spread a common culture that
stresses the benefits of achieving price stability” (Mishkin
2007)
– John Taylor’s work has been crucial in spreading that “common
culture”. Thank you, John!