The Great Moderation （4）

Improved Monetary Policy or a Shifting Taylor Curve?

Improvements in monetary policy that moved the economy closer to the efficient frontier described by the Taylor curve can account for part of the Great Moderation. However, several empirical studies have questioned the quantitative importance of this effect and emphasized instead shifts in the Taylor curve, brought about by structural change or good luck. For example, in a paper presented at the Federal Reserve Bank of Kansas City's annual Jackson Hole conference, James Stock and Mark Watson (2003) use several alternative macroeconomic models to simulate how the economy would have performed after 1984 if monetary policy had followed its pre-1979 pattern. Although inflation performance after 1984 would clearly have been worse if pre-1979 monetary policies had been used, Stock and Watson find that output volatility would have been little different. They conclude that improved monetary policy does not account for much of the reduction in output volatility since the mid-1980s. Instead, noting that the variance of the economic shocks implied by their models for the 1970s was much higher than the variance of shocks in the more recent period, they embrace the good-luck explanation of the Great Moderation. Interesting research by Timothy Cogley and Thomas Sargent (2002) and by Shaghil Ahmed, Andrew Levin, and Beth Anne Wilson (2002) likewise find a substantial reduction in the size and frequency of shocks in the more recent period, supporting the good-luck hypothesis.

 

Both the structural change and good-luck explanations of the Great Moderation are intriguing and (to reiterate) both are no doubt part of the story. However, an unsatisfying aspect of both explanations is the difficulty of identifying changes in the economic environment large enough and persistent enough to explain the Great Moderation, both in the United States and abroad. In particular, it is not obvious that economic shocks have become significantly smaller or more infrequent, as required by the good-luck hypothesis. Tensions in the Middle East, often blamed for the oil price shocks of the 1970s, have hardly declined in recent years, and important developments in technology and productivity have continued to buffet the economy (albeit in a more positive direction than in the 1970s). Nor has the international economic environment become obviously more placid, as a series of financial crises struck various regions of the world during the 1990s and the powerful forces of globalization have proceeded apace. In contrast, following the adverse experience of the 1970s, changes in the practice of monetary policy occurred around the world in similar ways and during approximately the same period.

影响是否足够深、足够长远？解决这个难题要求深入到经济模型中去，或者建立类似于TC这样的模型来加以说明。

 

Certainly, stability-enhancing changes in the economic environment have occurred in the past two decades. However, an intriguing possibility is that some of these changes, rather than being truly exogenous, may have been induced by improved monetary policies. That is, better monetary policies may have resulted in what appear to be (but only appear to be) favorable shifts in the economy's Taylor curve. Here are some examples of what I have in mind.

First, monetary policies that brought down and stabilized inflation may have led to stabilizing changes in the structure of the economy as well, in line with the prediction of the famous Lucas (1976) critique that economic structure depends on the policy regime. High and unstable inflation increases the variability of relative prices and real interest rates, for example, distorting decisions regarding consumption, capital investment, and inventory investment, among others. Likewise, the high level, variability, and unpredictability of inflation profoundly affected decisions regarding financial investments and money holdings. Theories of "rational inattention" (Sims, 2003), according to which people vary the frequency with which they re-examine economic decisions according to the underlying economic environment, imply that the dynamic behavior of the economy would change--probably in the direction of greater stability and persistence--in a more stable pricing environment, in which people reconsider their economic decisions less frequently.

高位、不稳定的通胀水平的影响：消费、资本形成、存货投资等等

Second, changes in monetary policy could conceivably affect the size and frequency of shocks hitting the economy, at least as an econometrician would measure those shocks. This assertion seems odd at first, as we are used to thinking of shocks as exogenous events, arising from "outside the model," so to speak. However, econometricians typically do not measure shocks directly but instead infer them from movements in macroeconomic variables that they cannot otherwise explain. Shocks in this sense may certainly reflect the monetary regime. For example, consider the cost-push shocks that played such an important role in 1970s' thinking about inflation. Seemingly unexplained or autonomous movements in wages and prices during this period, which analysts would have interpreted as shocks to wage and price equations, may in fact have been the result of earlier monetary policy actions, or (more subtly) of monetary policy actions expected by wage- and price-setters to take place in the future. In an influential paper, Robert Barsky and Lutz Kilian (2001) analyze the oil price shocks of the 1970s in this spirit. Barsky and Kilian provide evidence that the extraordinary increases in nominal oil prices during the 1970s were made feasible primarily by earlier expansionary monetary policies rather than by truly exogenous political or economic events.

 

Third, monetary policy can also affect the distribution of measured shocks by changing the sensitivity of pricing and other economic decisions to exogenous outside events. For example, significant movements in the price of oil and other commodities continued to occur after 1984. However, in a low-inflation environment, with stable inflation expectations and a general perception that firms do not have pricing power, commodity price shocks are not passed into final goods prices to nearly the same degree as in a looser monetary environment. As a result, a change in commodity prices of a given size shows up as a smaller shock to output and consumer prices today than it would have in the earlier period. Likewise, there is evidence that fluctuations in exchange rates have smaller effects on domestic prices and economic activity when inflation is less volatile and inflation expectations are stabilized (Gagnon and Ihrig, 2002; Devereux, Engel, and Storgaard, 2003).

不同经济环境下的政策效果不同

 

Fourth, changes in inflation expectations, which are ultimately the product of the monetary policy regime, can also be confused with truly exogenous shocks in conventional econometric analyses. Marvin Goodfriend (1993) has suggested, for example, that insufficiently anchored inflation expectations have led to periodic "inflation scares," in which inflation expectations have risen in an apparently autonomous manner. Increases in inflation expectations have the flavor of adverse aggregate supply shocks in that they tend to increase the volatility of both inflation and output, in a combination that depends on how strongly the monetary policymakers act to offset these changes in expectations.

Theoretical and empirical support for the idea that inflation expectations may become an independent source of instability has grown in recent years.¹² As I mentioned earlier, a number of researchers have found that the reaction of monetary policymakers to inflation has strengthened, in that the estimated coefficient on inflation in the Taylor rule has risen from something less than 1 before 1979 to a value significantly greater than 1 in the more recent period. If the policy interest rate responds to increases in inflation by less than one-for-one (so that the real policy rate does not rise in the face of higher inflation), economic theory tells us that inflation expectations and the economy in general can become unstable. The problem arises from the fact that, if policymakers do not react sufficiently aggressively to increases in inflation, spontaneously arising expectations of increased inflation can ultimately be self-confirming and even self-reinforcing. Incidentally, the stability requirement that the policy rate respond to inflation by more than one-for-one is called the Taylor principle (Taylor, 1993, 1999)--the third concept named after John Taylor that has played a role in this talk. The finding that monetary policymakers violated the Taylor principle during the 1970s but satisfied the principle in the past two decades would be consistent with a reduced incidence of destabilizing expectational shocks.¹³

Support for the view that inflation expectations can be an independent source of economic volatility has also emerged from the extensive recent literature on learning and macroeconomics (Evans and Honkopohja, 2001). For example, Athanasios Orphanides and John C. Williams (2003a, 2003b) have studied models in which the public must learn the central bank's underlying preferences regarding inflation by observing the actual inflation process.¹⁴ With learning, inflation expectations take on a more adaptive character; in particular, high and unstable inflation will beget similar characteristics in the pattern of inflation expectations. As Orphanides and Williams show, when inflation expectations are poorly anchored, so that the public is highly uncertain about the long-run rate of inflation that the central bank hopes to achieve, they can become an additional source of volatility in the economy. An analysis that did not properly control for the expectational effects of changes in monetary policy might incorrectly conclude that the Taylor curve had shifted in an adverse direction.

Conclusion

The Great Moderation, the substantial decline in macroeconomic volatility over the past twenty years, is a striking economic development. Whether the dominant cause of the Great Moderation is structural change, improved monetary policy, or simply good luck is an important question about which no consensus has yet formed. I have argued today that improved monetary policy has likely made an important contribution not only to the reduced volatility of inflation (which is not particularly controversial) but to the reduced volatility of output as well. Moreover, because a change in the monetary policy regime has pervasive effects, I have suggested that some of the effects of improved monetary policies may have been misidentified as exogenous changes in economic structure or in the distribution of economic shocks. This conclusion on my part makes me optimistic for the future, because I am confident that monetary policymakers will not forget the lessons of the 1970s.

 

I have put my case for better monetary policy rather forcefully today, because I think it likely that the policy explanation for the Great Moderation deserves more credit than it has received in the literature. However, let me close by emphasizing that the debate remains very much open. Although I have focused on its strengths, the monetary policy hypothesis has potential deficiencies as well. For example, although I pointed out the difficulty that the structural change and good-luck explanations have in accounting for the rather sharp decline in volatility after 1984, one might also question whether the change in monetary policy regime was sufficiently sharp to have had the effects I have attributed to it.¹⁵ The consistency of the monetary policy explanation with the experience of the 1950s, a period of stable inflation during which output volatility declined but was high in absolute terms, deserves further investigation. Moreover, several of the channels by which monetary policy may have affected volatility that I have mentioned today remain largely theoretical possibilities and have not received much in the way of rigorous empirical testing. One of my goals today was to stimulate further research on this question. Clearly, the sources of the Great Moderation will continue to be an area for fruitful analysis and debate.