speeches · September 12, 2008

Regional President Speech

James Bullard · President

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS THREE ISSUES IN LEARNING AND MONETARY POLICY JamesBullard PresidentandCEO 13September2008 LearningandMacroeconomicPolicy UniversityofCambridge,UK ViewsexpresseddonotnecessarilyreflectofficialpositionsoftheFOMCortheFederalReserveSystem.

Theroleforlearning: informationrevelation. Theroleforlearning: coordinationonpreferredequilibria. Theroleforlearning: filtering. Issuetwo: systemicrisk. Issuethree: optimalpolicyinaneconomywith non-fundamentalequilibria. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS LEARNING AND MONETARY POLICY Issueone: coreversusheadlineinflation.

Theroleforlearning: informationrevelation. Theroleforlearning: coordinationonpreferredequilibria. Issuetwo: systemicrisk. Issuethree: optimalpolicyinaneconomywith non-fundamentalequilibria. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS LEARNING AND MONETARY POLICY Issueone: coreversusheadlineinflation. Theroleforlearning: filtering.

Theroleforlearning: coordinationonpreferredequilibria. Theroleforlearning: informationrevelation. Issuethree: optimalpolicyinaneconomywith non-fundamentalequilibria. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS LEARNING AND MONETARY POLICY Issueone: coreversusheadlineinflation. Theroleforlearning: filtering. Issuetwo: systemicrisk.

Theroleforlearning: coordinationonpreferredequilibria. Issuethree: optimalpolicyinaneconomywith non-fundamentalequilibria. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS LEARNING AND MONETARY POLICY Issueone: coreversusheadlineinflation. Theroleforlearning: filtering. Issuetwo: systemicrisk. Theroleforlearning: informationrevelation.

Theroleforlearning: coordinationonpreferredequilibria. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS LEARNING AND MONETARY POLICY Issueone: coreversusheadlineinflation. Theroleforlearning: filtering. Issuetwo: systemicrisk. Theroleforlearning: informationrevelation. Issuethree: optimalpolicyinaneconomywith non-fundamentalequilibria.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS LEARNING AND MONETARY POLICY Issueone: coreversusheadlineinflation. Theroleforlearning: filtering. Issuetwo: systemicrisk. Theroleforlearning: informationrevelation. Issuethree: optimalpolicyinaneconomywith non-fundamentalequilibria. Theroleforlearning: coordinationonpreferredequilibria.

Theconventionalwisdomisprobablywrong. Buttheconventionalwisdomisdrivingpolicy. Timelyincurrentmonetarypolicydiscussions. Eachhasadistinctconventionalwisdombehindit. Welfareconsequencesinprinciplecouldbelarge. Anopeningforgoodresearchtoimpacteconomic outcomes. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS WHY THESE THREE ISSUES? Providesomefocus.

Theconventionalwisdomisprobablywrong. Buttheconventionalwisdomisdrivingpolicy. Eachhasadistinctconventionalwisdombehindit. Welfareconsequencesinprinciplecouldbelarge. Anopeningforgoodresearchtoimpacteconomic outcomes. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS WHY THESE THREE ISSUES? Providesomefocus. Timelyincurrentmonetarypolicydiscussions.

Theconventionalwisdomisprobablywrong. Buttheconventionalwisdomisdrivingpolicy. Welfareconsequencesinprinciplecouldbelarge. Anopeningforgoodresearchtoimpacteconomic outcomes. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS WHY THESE THREE ISSUES? Providesomefocus. Timelyincurrentmonetarypolicydiscussions. Eachhasadistinctconventionalwisdombehindit.

Buttheconventionalwisdomisdrivingpolicy. Welfareconsequencesinprinciplecouldbelarge. Anopeningforgoodresearchtoimpacteconomic outcomes. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS WHY THESE THREE ISSUES? Providesomefocus. Timelyincurrentmonetarypolicydiscussions. Eachhasadistinctconventionalwisdombehindit. Theconventionalwisdomisprobablywrong.

Welfareconsequencesinprinciplecouldbelarge. Anopeningforgoodresearchtoimpacteconomic outcomes. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS WHY THESE THREE ISSUES? Providesomefocus. Timelyincurrentmonetarypolicydiscussions. Eachhasadistinctconventionalwisdombehindit. Theconventionalwisdomisprobablywrong. Buttheconventionalwisdomisdrivingpolicy.

Anopeningforgoodresearchtoimpacteconomic outcomes. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS WHY THESE THREE ISSUES? Providesomefocus. Timelyincurrentmonetarypolicydiscussions. Eachhasadistinctconventionalwisdombehindit. Theconventionalwisdomisprobablywrong. Buttheconventionalwisdomisdrivingpolicy. Welfareconsequencesinprinciplecouldbelarge.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS WHY THESE THREE ISSUES? Providesomefocus. Timelyincurrentmonetarypolicydiscussions. Eachhasadistinctconventionalwisdombehindit. Theconventionalwisdomisprobablywrong. Buttheconventionalwisdomisdrivingpolicy. Welfareconsequencesinprinciplecouldbelarge. Anopeningforgoodresearchtoimpacteconomic outcomes.

Hamilton(1983);subsequentrevamping. Theadhocapproachsincethe70shasbeentoignore energypricemovementsandfocuson"core"inflation. InthepastIwouldhaveagreedthatthispracticehas serveduswell. NowIthinkthetidehasturnedandweneedtothink harder. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS A CORE ISSUE TheideathatoilpricesarecriticaltounderstandingU.S. andpossiblyG-7businesscycleshaswideappeal.

Theadhocapproachsincethe70shasbeentoignore energypricemovementsandfocuson"core"inflation. InthepastIwouldhaveagreedthatthispracticehas serveduswell. NowIthinkthetidehasturnedandweneedtothink harder. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS A CORE ISSUE TheideathatoilpricesarecriticaltounderstandingU.S. andpossiblyG-7businesscycleshaswideappeal. Hamilton(1983);subsequentrevamping.

InthepastIwouldhaveagreedthatthispracticehas serveduswell. NowIthinkthetidehasturnedandweneedtothink harder. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS A CORE ISSUE TheideathatoilpricesarecriticaltounderstandingU.S. andpossiblyG-7businesscycleshaswideappeal. Hamilton(1983);subsequentrevamping. Theadhocapproachsincethe70shasbeentoignore energypricemovementsandfocuson"core"inflation.

NowIthinkthetidehasturnedandweneedtothink harder. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS A CORE ISSUE TheideathatoilpricesarecriticaltounderstandingU.S. andpossiblyG-7businesscycleshaswideappeal. Hamilton(1983);subsequentrevamping. Theadhocapproachsincethe70shasbeentoignore energypricemovementsandfocuson"core"inflation. InthepastIwouldhaveagreedthatthispracticehas serveduswell.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS A CORE ISSUE TheideathatoilpricesarecriticaltounderstandingU.S. andpossiblyG-7businesscycleshaswideappeal. Hamilton(1983);subsequentrevamping. Theadhocapproachsincethe70shasbeentoignore energypricemovementsandfocuson"core"inflation. InthepastIwouldhaveagreedthatthispracticehas serveduswell. NowIthinkthetidehasturnedandweneedtothink harder.

U.S.monetarypolicycannothaveameaningfulimpacton globaloilmarkets. Ifoilpricemovementsaremainlynoisethenitshouldn’t matter. Aone-timeshiftinthelevelofoilpricesshouldnothavea bigimpact. Alongertermtrendinenergypriceswouldbemore problematic. But,a“theorem”saysthatenergypricescannotcontinueto increasefasterthanotherpricesforever. AlanBlinderofferedadefense. ThisistheconventionalwisdomechoedattheFOMC. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS BLINDER’S DEFENSE OF CORE Buiter’spaperatJacksonHole2008includedcriticismof “coreinflation.”

U.S.monetarypolicycannothaveameaningfulimpacton globaloilmarkets. Ifoilpricemovementsaremainlynoisethenitshouldn’t matter. Aone-timeshiftinthelevelofoilpricesshouldnothavea bigimpact. Alongertermtrendinenergypriceswouldbemore problematic. But,a“theorem”saysthatenergypricescannotcontinueto increasefasterthanotherpricesforever. ThisistheconventionalwisdomechoedattheFOMC. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS BLINDER’S DEFENSE OF CORE Buiter’spaperatJacksonHole2008includedcriticismof “coreinflation.” AlanBlinderofferedadefense.

Ifoilpricemovementsaremainlynoisethenitshouldn’t matter. Aone-timeshiftinthelevelofoilpricesshouldnothavea bigimpact. Alongertermtrendinenergypriceswouldbemore problematic. But,a“theorem”saysthatenergypricescannotcontinueto increasefasterthanotherpricesforever. ThisistheconventionalwisdomechoedattheFOMC. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS BLINDER’S DEFENSE OF CORE Buiter’spaperatJacksonHole2008includedcriticismof “coreinflation.” AlanBlinderofferedadefense. U.S.monetarypolicycannothaveameaningfulimpacton globaloilmarkets.

Aone-timeshiftinthelevelofoilpricesshouldnothavea bigimpact. Alongertermtrendinenergypriceswouldbemore problematic. But,a“theorem”saysthatenergypricescannotcontinueto increasefasterthanotherpricesforever. ThisistheconventionalwisdomechoedattheFOMC. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS BLINDER’S DEFENSE OF CORE Buiter’spaperatJacksonHole2008includedcriticismof “coreinflation.” AlanBlinderofferedadefense. U.S.monetarypolicycannothaveameaningfulimpacton globaloilmarkets. Ifoilpricemovementsaremainlynoisethenitshouldn’t matter.

Alongertermtrendinenergypriceswouldbemore problematic. But,a“theorem”saysthatenergypricescannotcontinueto increasefasterthanotherpricesforever. ThisistheconventionalwisdomechoedattheFOMC. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS BLINDER’S DEFENSE OF CORE Buiter’spaperatJacksonHole2008includedcriticismof “coreinflation.” AlanBlinderofferedadefense. U.S.monetarypolicycannothaveameaningfulimpacton globaloilmarkets. Ifoilpricemovementsaremainlynoisethenitshouldn’t matter. Aone-timeshiftinthelevelofoilpricesshouldnothavea bigimpact.

But,a“theorem”saysthatenergypricescannotcontinueto increasefasterthanotherpricesforever. ThisistheconventionalwisdomechoedattheFOMC. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS BLINDER’S DEFENSE OF CORE Buiter’spaperatJacksonHole2008includedcriticismof “coreinflation.” AlanBlinderofferedadefense. U.S.monetarypolicycannothaveameaningfulimpacton globaloilmarkets. Ifoilpricemovementsaremainlynoisethenitshouldn’t matter. Aone-timeshiftinthelevelofoilpricesshouldnothavea bigimpact. Alongertermtrendinenergypriceswouldbemore problematic.

ThisistheconventionalwisdomechoedattheFOMC. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS BLINDER’S DEFENSE OF CORE Buiter’spaperatJacksonHole2008includedcriticismof “coreinflation.” AlanBlinderofferedadefense. U.S.monetarypolicycannothaveameaningfulimpacton globaloilmarkets. Ifoilpricemovementsaremainlynoisethenitshouldn’t matter. Aone-timeshiftinthelevelofoilpricesshouldnothavea bigimpact. Alongertermtrendinenergypriceswouldbemore problematic. But,a“theorem”saysthatenergypricescannotcontinueto increasefasterthanotherpricesforever.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS BLINDER’S DEFENSE OF CORE Buiter’spaperatJacksonHole2008includedcriticismof “coreinflation.” AlanBlinderofferedadefense. U.S.monetarypolicycannothaveameaningfulimpacton globaloilmarkets. Ifoilpricemovementsaremainlynoisethenitshouldn’t matter. Aone-timeshiftinthelevelofoilpricesshouldnothavea bigimpact. Alongertermtrendinenergypriceswouldbemore problematic. But,a“theorem”saysthatenergypricescannotcontinueto increasefasterthanotherpricesforever. ThisistheconventionalwisdomechoedattheFOMC.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS

(Although,why2003?) The“theorem”maynothavemuchbite. Thismaynotworkwiththemostrecentdata. Veryplausiblethatthisisdrivenbyincreaseddemand fromthedevelopingworld. Alsoplausiblethatthiscouldgoonforalongtime. Decades. ThinkSolowmodel. Empiricalliterature: whatbestpredictsfutureheadline inflation? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME PROBLEMS WITH THE CONVENTIONAL WISDOM Oilpricemovementslookmorelikeafive-yeartrend.

The“theorem”maynothavemuchbite. Thismaynotworkwiththemostrecentdata. (Although,why2003?) Alsoplausiblethatthiscouldgoonforalongtime. Decades. ThinkSolowmodel. Empiricalliterature: whatbestpredictsfutureheadline inflation? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME PROBLEMS WITH THE CONVENTIONAL WISDOM Oilpricemovementslookmorelikeafive-yeartrend. Veryplausiblethatthisisdrivenbyincreaseddemand fromthedevelopingworld.

The“theorem”maynothavemuchbite. Thismaynotworkwiththemostrecentdata. Alsoplausiblethatthiscouldgoonforalongtime. Decades. ThinkSolowmodel. Empiricalliterature: whatbestpredictsfutureheadline inflation? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME PROBLEMS WITH THE CONVENTIONAL WISDOM Oilpricemovementslookmorelikeafive-yeartrend. Veryplausiblethatthisisdrivenbyincreaseddemand fromthedevelopingworld. (Although,why2003?)

Thismaynotworkwiththemostrecentdata. The“theorem”maynothavemuchbite. Empiricalliterature: whatbestpredictsfutureheadline inflation? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME PROBLEMS WITH THE CONVENTIONAL WISDOM Oilpricemovementslookmorelikeafive-yeartrend. Veryplausiblethatthisisdrivenbyincreaseddemand fromthedevelopingworld. (Although,why2003?) Alsoplausiblethatthiscouldgoonforalongtime. Decades. ThinkSolowmodel.

Thismaynotworkwiththemostrecentdata. Empiricalliterature: whatbestpredictsfutureheadline inflation? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME PROBLEMS WITH THE CONVENTIONAL WISDOM Oilpricemovementslookmorelikeafive-yeartrend. Veryplausiblethatthisisdrivenbyincreaseddemand fromthedevelopingworld. (Although,why2003?) Alsoplausiblethatthiscouldgoonforalongtime. Decades. ThinkSolowmodel. The“theorem”maynothavemuchbite.

Thismaynotworkwiththemostrecentdata. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME PROBLEMS WITH THE CONVENTIONAL WISDOM Oilpricemovementslookmorelikeafive-yeartrend. Veryplausiblethatthisisdrivenbyincreaseddemand fromthedevelopingworld. (Although,why2003?) Alsoplausiblethatthiscouldgoonforalongtime. Decades. ThinkSolowmodel. The“theorem”maynothavemuchbite. Empiricalliterature: whatbestpredictsfutureheadline inflation?

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME PROBLEMS WITH THE CONVENTIONAL WISDOM Oilpricemovementslookmorelikeafive-yeartrend. Veryplausiblethatthisisdrivenbyincreaseddemand fromthedevelopingworld. (Although,why2003?) Alsoplausiblethatthiscouldgoonforalongtime. Decades. ThinkSolowmodel. The“theorem”maynothavemuchbite. Empiricalliterature: whatbestpredictsfutureheadline inflation? Thismaynotworkwiththemostrecentdata.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS

Mysenseisthattheorywouldalwaysputsomeweighton eachprice. Theadhocaspectofthe“core”ideawouldberemoved. Householdsandpolicymakerswouldsolveanoptimal filteringproblem. Thiswoulditselfinfluencetheequilibrium. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Iwouldliketoseemoretheory-orientedapproachestothe subject,lessstatistics.

Theadhocaspectofthe“core”ideawouldberemoved. Householdsandpolicymakerswouldsolveanoptimal filteringproblem. Thiswoulditselfinfluencetheequilibrium. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Iwouldliketoseemoretheory-orientedapproachestothe subject,lessstatistics. Mysenseisthattheorywouldalwaysputsomeweighton eachprice.

Householdsandpolicymakerswouldsolveanoptimal filteringproblem. Thiswoulditselfinfluencetheequilibrium. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Iwouldliketoseemoretheory-orientedapproachestothe subject,lessstatistics. Mysenseisthattheorywouldalwaysputsomeweighton eachprice. Theadhocaspectofthe“core”ideawouldberemoved.

Thiswoulditselfinfluencetheequilibrium. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Iwouldliketoseemoretheory-orientedapproachestothe subject,lessstatistics. Mysenseisthattheorywouldalwaysputsomeweighton eachprice. Theadhocaspectofthe“core”ideawouldberemoved. Householdsandpolicymakerswouldsolveanoptimal filteringproblem.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Iwouldliketoseemoretheory-orientedapproachestothe subject,lessstatistics. Mysenseisthattheorywouldalwaysputsomeweighton eachprice. Theadhocaspectofthe“core”ideawouldberemoved. Householdsandpolicymakerswouldsolveanoptimal filteringproblem. Thiswoulditselfinfluencetheequilibrium.

Intermediategoods. Openeconomies. Pricestickiness. Theequilibriumwouldinvolveongoinglearningabout howmuchweighttoputonvariouspricemovementsin policymaking. Imponderables: THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY, CONTINUED Householdsandpolicymakerswouldhavetotrack changingrelativeprices.

Intermediategoods. Openeconomies. Pricestickiness. Imponderables: THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY, CONTINUED Householdsandpolicymakerswouldhavetotrack changingrelativeprices. Theequilibriumwouldinvolveongoinglearningabout howmuchweighttoputonvariouspricemovementsin policymaking.

Intermediategoods. Openeconomies. Pricestickiness. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY, CONTINUED Householdsandpolicymakerswouldhavetotrack changingrelativeprices. Theequilibriumwouldinvolveongoinglearningabout howmuchweighttoputonvariouspricemovementsin policymaking. Imponderables:

Openeconomies. Pricestickiness. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY, CONTINUED Householdsandpolicymakerswouldhavetotrack changingrelativeprices. Theequilibriumwouldinvolveongoinglearningabout howmuchweighttoputonvariouspricemovementsin policymaking. Imponderables: Intermediategoods.

Pricestickiness. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY, CONTINUED Householdsandpolicymakerswouldhavetotrack changingrelativeprices. Theequilibriumwouldinvolveongoinglearningabout howmuchweighttoputonvariouspricemovementsin policymaking. Imponderables: Intermediategoods. Openeconomies.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY, CONTINUED Householdsandpolicymakerswouldhavetotrack changingrelativeprices. Theequilibriumwouldinvolveongoinglearningabout howmuchweighttoputonvariouspricemovementsin policymaking. Imponderables: Intermediategoods. Openeconomies. Pricestickiness.

MartinBodenstein,ChrisErceg,andLucaGuerrieri. “OptimalMonetaryPolicyinaModelwithDistinctCore andHeadlineInflationRates.”JME,forthcoming. RetailpricesareCalvo-sticky,wagesareCalvo-sticky, energypricesareflexible. Thismeans“coreprices”aresticky. Thismakescore inflationthekeytowelfaremaximization. Thisgivesthemainresult. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ONE THEORY Oneexamplewithoutanylearning:

RetailpricesareCalvo-sticky,wagesareCalvo-sticky, energypricesareflexible. Thismeans“coreprices”aresticky. Thismakescore inflationthekeytowelfaremaximization. Thisgivesthemainresult. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ONE THEORY Oneexamplewithoutanylearning: MartinBodenstein,ChrisErceg,andLucaGuerrieri. “OptimalMonetaryPolicyinaModelwithDistinctCore andHeadlineInflationRates.”JME,forthcoming.

Thismeans“coreprices”aresticky. Thismakescore inflationthekeytowelfaremaximization. Thisgivesthemainresult. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ONE THEORY Oneexamplewithoutanylearning: MartinBodenstein,ChrisErceg,andLucaGuerrieri. “OptimalMonetaryPolicyinaModelwithDistinctCore andHeadlineInflationRates.”JME,forthcoming. RetailpricesareCalvo-sticky,wagesareCalvo-sticky, energypricesareflexible.

Thisgivesthemainresult. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ONE THEORY Oneexamplewithoutanylearning: MartinBodenstein,ChrisErceg,andLucaGuerrieri. “OptimalMonetaryPolicyinaModelwithDistinctCore andHeadlineInflationRates.”JME,forthcoming. RetailpricesareCalvo-sticky,wagesareCalvo-sticky, energypricesareflexible. Thismeans“coreprices”aresticky. Thismakescore inflationthekeytowelfaremaximization.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ONE THEORY Oneexamplewithoutanylearning: MartinBodenstein,ChrisErceg,andLucaGuerrieri. “OptimalMonetaryPolicyinaModelwithDistinctCore andHeadlineInflationRates.”JME,forthcoming. RetailpricesareCalvo-sticky,wagesareCalvo-sticky, energypricesareflexible. Thismeans“coreprices”aresticky. Thismakescore inflationthekeytowelfaremaximization. Thisgivesthemainresult.

Thistheorywouldputalotofemphasison“what’s sticky?” Theviewofpolicymakerswouldbe,“whatpricesdo consumersactuallyface?” “Degreesofpricestickiness”wouldsuggestoptimal filteringinthissetting. Also,thefinalgoodspricecontainstheweightedenergy inputprice. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS REMARKS Atrendintherelativepriceofenergyisnotpartofthe analysis.

Theviewofpolicymakerswouldbe,“whatpricesdo consumersactuallyface?” “Degreesofpricestickiness”wouldsuggestoptimal filteringinthissetting. Also,thefinalgoodspricecontainstheweightedenergy inputprice. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS REMARKS Atrendintherelativepriceofenergyisnotpartofthe analysis. Thistheorywouldputalotofemphasison“what’s sticky?”

“Degreesofpricestickiness”wouldsuggestoptimal filteringinthissetting. Also,thefinalgoodspricecontainstheweightedenergy inputprice. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS REMARKS Atrendintherelativepriceofenergyisnotpartofthe analysis. Thistheorywouldputalotofemphasison“what’s sticky?” Theviewofpolicymakerswouldbe,“whatpricesdo consumersactuallyface?”

Also,thefinalgoodspricecontainstheweightedenergy inputprice. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS REMARKS Atrendintherelativepriceofenergyisnotpartofthe analysis. Thistheorywouldputalotofemphasison“what’s sticky?” Theviewofpolicymakerswouldbe,“whatpricesdo consumersactuallyface?” “Degreesofpricestickiness”wouldsuggestoptimal filteringinthissetting.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS REMARKS Atrendintherelativepriceofenergyisnotpartofthe analysis. Thistheorywouldputalotofemphasison“what’s sticky?” Theviewofpolicymakerswouldbe,“whatpricesdo consumersactuallyface?” “Degreesofpricestickiness”wouldsuggestoptimal filteringinthissetting. Also,thefinalgoodspricecontainstheweightedenergy inputprice.

Thebasicideaisthatthesuddenfailureofasinglefirm maycauseother,healthy,firmstofailatthesametime. Thiswoulddamagetheintermediationsector,andit wouldtakealongtimetorecover. Macroeconomicmodelsdonottypicallyaddressthistopic. Risingorfallingsystemicriskispushedintothestochastic terms. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS THE SYSTEMIC RISK STORY Monetarypolicyhasbeenheavilyinfluencedbyideas concerningsystemicriskinthelastyearorso.

Thiswoulddamagetheintermediationsector,andit wouldtakealongtimetorecover. Macroeconomicmodelsdonottypicallyaddressthistopic. Risingorfallingsystemicriskispushedintothestochastic terms. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS THE SYSTEMIC RISK STORY Monetarypolicyhasbeenheavilyinfluencedbyideas concerningsystemicriskinthelastyearorso. Thebasicideaisthatthesuddenfailureofasinglefirm maycauseother,healthy,firmstofailatthesametime.

Macroeconomicmodelsdonottypicallyaddressthistopic. Risingorfallingsystemicriskispushedintothestochastic terms. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS THE SYSTEMIC RISK STORY Monetarypolicyhasbeenheavilyinfluencedbyideas concerningsystemicriskinthelastyearorso. Thebasicideaisthatthesuddenfailureofasinglefirm maycauseother,healthy,firmstofailatthesametime. Thiswoulddamagetheintermediationsector,andit wouldtakealongtimetorecover.

Risingorfallingsystemicriskispushedintothestochastic terms. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS THE SYSTEMIC RISK STORY Monetarypolicyhasbeenheavilyinfluencedbyideas concerningsystemicriskinthelastyearorso. Thebasicideaisthatthesuddenfailureofasinglefirm maycauseother,healthy,firmstofailatthesametime. Thiswoulddamagetheintermediationsector,andit wouldtakealongtimetorecover. Macroeconomicmodelsdonottypicallyaddressthistopic.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS THE SYSTEMIC RISK STORY Monetarypolicyhasbeenheavilyinfluencedbyideas concerningsystemicriskinthelastyearorso. Thebasicideaisthatthesuddenfailureofasinglefirm maycauseother,healthy,firmstofailatthesametime. Thiswoulddamagetheintermediationsector,andit wouldtakealongtimetorecover. Macroeconomicmodelsdonottypicallyaddressthistopic. Risingorfallingsystemicriskispushedintothestochastic terms.

Theaireof“collapseofthefinancialsystem”isworrisome. Atthesametime,allfinancialfirmshaveincentivestotell thisstorywhennecessaryinordertoavoidlosingmoney. Manygenuinelybelieveit. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS A SLIPPERY CONCEPT Thesystemicriskstoryisdifficulttocopewithinthe policyworld.

Atthesametime,allfinancialfirmshaveincentivestotell thisstorywhennecessaryinordertoavoidlosingmoney. Manygenuinelybelieveit. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS A SLIPPERY CONCEPT Thesystemicriskstoryisdifficulttocopewithinthe policyworld. Theaireof“collapseofthefinancialsystem”isworrisome.

Manygenuinelybelieveit. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS A SLIPPERY CONCEPT Thesystemicriskstoryisdifficulttocopewithinthe policyworld. Theaireof“collapseofthefinancialsystem”isworrisome. Atthesametime,allfinancialfirmshaveincentivestotell thisstorywhennecessaryinordertoavoidlosingmoney.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS A SLIPPERY CONCEPT Thesystemicriskstoryisdifficulttocopewithinthe policyworld. Theaireof“collapseofthefinancialsystem”isworrisome. Atthesametime,allfinancialfirmshaveincentivestotell thisstorywhennecessaryinordertoavoidlosingmoney. Manygenuinelybelieveit.

Therewasanequilibrium,butpolicymakersand consumersdidnotlikethatequilibrium. InterestedlistenersmightconsultGaryRichardsonand WilliamTroost,“MonetaryInterventionMitigatedBanking PanicsDuringtheDepression.” Therewereperiodicpanicsinthe19thcenturyU.S. betweentheCivilWarandthefoundingoftheFederal Reserve. Ofcourse,thereistheGreatDepression. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS HISTORY Recenthistoryincludeslargefailureswithoutlarge repercussions: DrexelBurnhamLambertin1990,Barings Bankin1995,LongTermCapitalManagementin1998, Enronin2001,andAmaranthAdvisorsin2006.

InterestedlistenersmightconsultGaryRichardsonand WilliamTroost,“MonetaryInterventionMitigatedBanking PanicsDuringtheDepression.” Therewasanequilibrium,butpolicymakersand consumersdidnotlikethatequilibrium. Ofcourse,thereistheGreatDepression. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS HISTORY Recenthistoryincludeslargefailureswithoutlarge repercussions: DrexelBurnhamLambertin1990,Barings Bankin1995,LongTermCapitalManagementin1998, Enronin2001,andAmaranthAdvisorsin2006. Therewereperiodicpanicsinthe19thcenturyU.S. betweentheCivilWarandthefoundingoftheFederal Reserve.

InterestedlistenersmightconsultGaryRichardsonand WilliamTroost,“MonetaryInterventionMitigatedBanking PanicsDuringtheDepression.” Ofcourse,thereistheGreatDepression. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS HISTORY Recenthistoryincludeslargefailureswithoutlarge repercussions: DrexelBurnhamLambertin1990,Barings Bankin1995,LongTermCapitalManagementin1998, Enronin2001,andAmaranthAdvisorsin2006. Therewereperiodicpanicsinthe19thcenturyU.S. betweentheCivilWarandthefoundingoftheFederal Reserve. Therewasanequilibrium,butpolicymakersand consumersdidnotlikethatequilibrium.

InterestedlistenersmightconsultGaryRichardsonand WilliamTroost,“MonetaryInterventionMitigatedBanking PanicsDuringtheDepression.” THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS HISTORY Recenthistoryincludeslargefailureswithoutlarge repercussions: DrexelBurnhamLambertin1990,Barings Bankin1995,LongTermCapitalManagementin1998, Enronin2001,andAmaranthAdvisorsin2006. Therewereperiodicpanicsinthe19thcenturyU.S. betweentheCivilWarandthefoundingoftheFederal Reserve. Therewasanequilibrium,butpolicymakersand consumersdidnotlikethatequilibrium. Ofcourse,thereistheGreatDepression.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS HISTORY Recenthistoryincludeslargefailureswithoutlarge repercussions: DrexelBurnhamLambertin1990,Barings Bankin1995,LongTermCapitalManagementin1998, Enronin2001,andAmaranthAdvisorsin2006. Therewereperiodicpanicsinthe19thcenturyU.S. betweentheCivilWarandthefoundingoftheFederal Reserve. Therewasanequilibrium,butpolicymakersand consumersdidnotlikethatequilibrium. Ofcourse,thereistheGreatDepression. InterestedlistenersmightconsultGaryRichardsonand WilliamTroost,“MonetaryInterventionMitigatedBanking PanicsDuringtheDepression.”

Thissoundslikemultiplesteadystates. Requiresanotionofwhatdrivesthedynamicsaroundeach steadystate. Tothisgroup: THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS MULTIPLE STEADY STATES? JacksonHolequestion: Howmuchweightshould policymakersputonanimplicit“financialstability” objective,relativetopricestabilityandmaximum sustainableemployment?

Thissoundslikemultiplesteadystates. Requiresanotionofwhatdrivesthedynamicsaroundeach steadystate. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS MULTIPLE STEADY STATES? JacksonHolequestion: Howmuchweightshould policymakersputonanimplicit“financialstability” objective,relativetopricestabilityandmaximum sustainableemployment? Tothisgroup:

Requiresanotionofwhatdrivesthedynamicsaroundeach steadystate. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS MULTIPLE STEADY STATES? JacksonHolequestion: Howmuchweightshould policymakersputonanimplicit“financialstability” objective,relativetopricestabilityandmaximum sustainableemployment? Tothisgroup: Thissoundslikemultiplesteadystates.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS MULTIPLE STEADY STATES? JacksonHolequestion: Howmuchweightshould policymakersputonanimplicit“financialstability” objective,relativetopricestabilityandmaximum sustainableemployment? Tothisgroup: Thissoundslikemultiplesteadystates. Requiresanotionofwhatdrivesthedynamicsaroundeach steadystate.

Certainpolicyrules,ifadopted,wouldgeneratean unstabletargetequilibrium. Thepolicymakercommunitydoesnotusuallytalkinthese terms. Nofinancialintermediationcomponent. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ONE THEORY Onepaperatthisconference,GeorgeEvansandSeppo Honkapohja,“RobustLearningStabilitywithOperational MonetaryPolicyRules,”takesstepsinthisdirection.

Thepolicymakercommunitydoesnotusuallytalkinthese terms. Nofinancialintermediationcomponent. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ONE THEORY Onepaperatthisconference,GeorgeEvansandSeppo Honkapohja,“RobustLearningStabilitywithOperational MonetaryPolicyRules,”takesstepsinthisdirection. Certainpolicyrules,ifadopted,wouldgeneratean unstabletargetequilibrium.

Nofinancialintermediationcomponent. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ONE THEORY Onepaperatthisconference,GeorgeEvansandSeppo Honkapohja,“RobustLearningStabilitywithOperational MonetaryPolicyRules,”takesstepsinthisdirection. Certainpolicyrules,ifadopted,wouldgeneratean unstabletargetequilibrium. Thepolicymakercommunitydoesnotusuallytalkinthese terms.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ONE THEORY Onepaperatthisconference,GeorgeEvansandSeppo Honkapohja,“RobustLearningStabilitywithOperational MonetaryPolicyRules,”takesstepsinthisdirection. Certainpolicyrules,ifadopted,wouldgeneratean unstabletargetequilibrium. Thepolicymakercommunitydoesnotusuallytalkinthese terms. Nofinancialintermediationcomponent.

Theendogenousdebtconstraintsliteratureemphasizesthat thepenaltyfordefaultinfluencestheequilibriumlevelof credit. Oneinterpretationoffinancialmarketsisthatinformation isbeingrevealedeveryday. Allplayersunderstandtheincentivestowithhold information. Therefore,theyareBayesianlearnerswithrespecttothe announcementsmadebyotherfirms. Theyalsounderstandthesequenceofeventsifthereisa default. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Togetclosertothefinancialinstabilitystoryatheory needstoincorporateprivateinformationheldby interlinkedfinancialfirms.

Theendogenousdebtconstraintsliteratureemphasizesthat thepenaltyfordefaultinfluencestheequilibriumlevelof credit. Allplayersunderstandtheincentivestowithhold information. Therefore,theyareBayesianlearnerswithrespecttothe announcementsmadebyotherfirms. Theyalsounderstandthesequenceofeventsifthereisa default. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Togetclosertothefinancialinstabilitystoryatheory needstoincorporateprivateinformationheldby interlinkedfinancialfirms. Oneinterpretationoffinancialmarketsisthatinformation isbeingrevealedeveryday.

Theendogenousdebtconstraintsliteratureemphasizesthat thepenaltyfordefaultinfluencestheequilibriumlevelof credit. Therefore,theyareBayesianlearnerswithrespecttothe announcementsmadebyotherfirms. Theyalsounderstandthesequenceofeventsifthereisa default. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Togetclosertothefinancialinstabilitystoryatheory needstoincorporateprivateinformationheldby interlinkedfinancialfirms. Oneinterpretationoffinancialmarketsisthatinformation isbeingrevealedeveryday. Allplayersunderstandtheincentivestowithhold information.

Theendogenousdebtconstraintsliteratureemphasizesthat thepenaltyfordefaultinfluencestheequilibriumlevelof credit. Theyalsounderstandthesequenceofeventsifthereisa default. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Togetclosertothefinancialinstabilitystoryatheory needstoincorporateprivateinformationheldby interlinkedfinancialfirms. Oneinterpretationoffinancialmarketsisthatinformation isbeingrevealedeveryday. Allplayersunderstandtheincentivestowithhold information. Therefore,theyareBayesianlearnerswithrespecttothe announcementsmadebyotherfirms.

Theendogenousdebtconstraintsliteratureemphasizesthat thepenaltyfordefaultinfluencestheequilibriumlevelof credit. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Togetclosertothefinancialinstabilitystoryatheory needstoincorporateprivateinformationheldby interlinkedfinancialfirms. Oneinterpretationoffinancialmarketsisthatinformation isbeingrevealedeveryday. Allplayersunderstandtheincentivestowithhold information. Therefore,theyareBayesianlearnerswithrespecttothe announcementsmadebyotherfirms. Theyalsounderstandthesequenceofeventsifthereisa default.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Togetclosertothefinancialinstabilitystoryatheory needstoincorporateprivateinformationheldby interlinkedfinancialfirms. Oneinterpretationoffinancialmarketsisthatinformation isbeingrevealedeveryday. Allplayersunderstandtheincentivestowithhold information. Therefore,theyareBayesianlearnerswithrespecttothe announcementsmadebyotherfirms. Theyalsounderstandthesequenceofeventsifthereisa default. Theendogenousdebtconstraintsliteratureemphasizesthat thepenaltyfordefaultinfluencestheequilibriumlevelof credit.

Inotherindustries,thefailureofalargerivalisgoodfor business. Woulditbreakdowninresponsetocertainshocksand causeEvans-Honkapohja-styleinstability? Mysenseisno,becausetheplayerswouldunderstandthe riskoffailureofapartnerfirm. Buttheconventional wisdomisyes. Itisimportantthatwegetanideaofthefundamental problemwearetryingtoaddresswhenitcomesto financialstability. InterestedlistenersmightcheckFranklinAllen’soverview atJacksonHole,“UnderstandingFinancialCrises.” THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS EQUILIBRIUM WouldtheBayesianequilibriumsomehowbe“fragile”?

Inotherindustries,thefailureofalargerivalisgoodfor business. Mysenseisno,becausetheplayerswouldunderstandthe riskoffailureofapartnerfirm. Buttheconventional wisdomisyes. Itisimportantthatwegetanideaofthefundamental problemwearetryingtoaddresswhenitcomesto financialstability. InterestedlistenersmightcheckFranklinAllen’soverview atJacksonHole,“UnderstandingFinancialCrises.” THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS EQUILIBRIUM WouldtheBayesianequilibriumsomehowbe“fragile”? Woulditbreakdowninresponsetocertainshocksand causeEvans-Honkapohja-styleinstability?

Inotherindustries,thefailureofalargerivalisgoodfor business. Itisimportantthatwegetanideaofthefundamental problemwearetryingtoaddresswhenitcomesto financialstability. InterestedlistenersmightcheckFranklinAllen’soverview atJacksonHole,“UnderstandingFinancialCrises.” THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS EQUILIBRIUM WouldtheBayesianequilibriumsomehowbe“fragile”? Woulditbreakdowninresponsetocertainshocksand causeEvans-Honkapohja-styleinstability? Mysenseisno,becausetheplayerswouldunderstandthe riskoffailureofapartnerfirm. Buttheconventional wisdomisyes.

Itisimportantthatwegetanideaofthefundamental problemwearetryingtoaddresswhenitcomesto financialstability. InterestedlistenersmightcheckFranklinAllen’soverview atJacksonHole,“UnderstandingFinancialCrises.” THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS EQUILIBRIUM WouldtheBayesianequilibriumsomehowbe“fragile”? Woulditbreakdowninresponsetocertainshocksand causeEvans-Honkapohja-styleinstability? Mysenseisno,becausetheplayerswouldunderstandthe riskoffailureofapartnerfirm. Buttheconventional wisdomisyes. Inotherindustries,thefailureofalargerivalisgoodfor business.

InterestedlistenersmightcheckFranklinAllen’soverview atJacksonHole,“UnderstandingFinancialCrises.” THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS EQUILIBRIUM WouldtheBayesianequilibriumsomehowbe“fragile”? Woulditbreakdowninresponsetocertainshocksand causeEvans-Honkapohja-styleinstability? Mysenseisno,becausetheplayerswouldunderstandthe riskoffailureofapartnerfirm. Buttheconventional wisdomisyes. Inotherindustries,thefailureofalargerivalisgoodfor business. Itisimportantthatwegetanideaofthefundamental problemwearetryingtoaddresswhenitcomesto financialstability.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS EQUILIBRIUM WouldtheBayesianequilibriumsomehowbe“fragile”? Woulditbreakdowninresponsetocertainshocksand causeEvans-Honkapohja-styleinstability? Mysenseisno,becausetheplayerswouldunderstandthe riskoffailureofapartnerfirm. Buttheconventional wisdomisyes. Inotherindustries,thefailureofalargerivalisgoodfor business. Itisimportantthatwegetanideaofthefundamental problemwearetryingtoaddresswhenitcomesto financialstability. InterestedlistenersmightcheckFranklinAllen’soverview atJacksonHole,“UnderstandingFinancialCrises.”

Story: Oilat$145abarrel. Marketinsiderstoldmeitwaswildlyhighandturnedout toberight. Ifyouthinkitispersistentfundamentals,youmightpredict basedonarandomwalk,otherwiseyoupredictacrash. Intheliteratureithasbeenanuphillclimb. Manyeconomistsremainskepticalofmultipleequilibria. But,tobefair,muchmorewidelyacceptedtodaythanit oncewas. Inthepolicyandfinancialmarketsworlds,“bubbles”are takenasself-evident. Whatshouldpolicymakersdo? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ECONOMISTS VERSUS THE WORLD Ihaveworkedafairamountonnon-fundamental equilibria.

Story: Oilat$145abarrel. Marketinsiderstoldmeitwaswildlyhighandturnedout toberight. Ifyouthinkitispersistentfundamentals,youmightpredict basedonarandomwalk,otherwiseyoupredictacrash. Manyeconomistsremainskepticalofmultipleequilibria. But,tobefair,muchmorewidelyacceptedtodaythanit oncewas. Inthepolicyandfinancialmarketsworlds,“bubbles”are takenasself-evident. Whatshouldpolicymakersdo? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ECONOMISTS VERSUS THE WORLD Ihaveworkedafairamountonnon-fundamental equilibria. Intheliteratureithasbeenanuphillclimb.

Story: Oilat$145abarrel. Marketinsiderstoldmeitwaswildlyhighandturnedout toberight. Ifyouthinkitispersistentfundamentals,youmightpredict basedonarandomwalk,otherwiseyoupredictacrash. But,tobefair,muchmorewidelyacceptedtodaythanit oncewas. Inthepolicyandfinancialmarketsworlds,“bubbles”are takenasself-evident. Whatshouldpolicymakersdo? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ECONOMISTS VERSUS THE WORLD Ihaveworkedafairamountonnon-fundamental equilibria. Intheliteratureithasbeenanuphillclimb. Manyeconomistsremainskepticalofmultipleequilibria.

Story: Oilat$145abarrel. Marketinsiderstoldmeitwaswildlyhighandturnedout toberight. Ifyouthinkitispersistentfundamentals,youmightpredict basedonarandomwalk,otherwiseyoupredictacrash. Inthepolicyandfinancialmarketsworlds,“bubbles”are takenasself-evident. Whatshouldpolicymakersdo? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ECONOMISTS VERSUS THE WORLD Ihaveworkedafairamountonnon-fundamental equilibria. Intheliteratureithasbeenanuphillclimb. Manyeconomistsremainskepticalofmultipleequilibria. But,tobefair,muchmorewidelyacceptedtodaythanit oncewas.

Story: Oilat$145abarrel. Marketinsiderstoldmeitwaswildlyhighandturnedout toberight. Ifyouthinkitispersistentfundamentals,youmightpredict basedonarandomwalk,otherwiseyoupredictacrash. Whatshouldpolicymakersdo? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ECONOMISTS VERSUS THE WORLD Ihaveworkedafairamountonnon-fundamental equilibria. Intheliteratureithasbeenanuphillclimb. Manyeconomistsremainskepticalofmultipleequilibria. But,tobefair,muchmorewidelyacceptedtodaythanit oncewas. Inthepolicyandfinancialmarketsworlds,“bubbles”are takenasself-evident.

Marketinsiderstoldmeitwaswildlyhighandturnedout toberight. Ifyouthinkitispersistentfundamentals,youmightpredict basedonarandomwalk,otherwiseyoupredictacrash. Whatshouldpolicymakersdo? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ECONOMISTS VERSUS THE WORLD Ihaveworkedafairamountonnon-fundamental equilibria. Intheliteratureithasbeenanuphillclimb. Manyeconomistsremainskepticalofmultipleequilibria. But,tobefair,muchmorewidelyacceptedtodaythanit oncewas. Inthepolicyandfinancialmarketsworlds,“bubbles”are takenasself-evident. Story: Oilat$145abarrel.

Ifyouthinkitispersistentfundamentals,youmightpredict basedonarandomwalk,otherwiseyoupredictacrash. Whatshouldpolicymakersdo? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ECONOMISTS VERSUS THE WORLD Ihaveworkedafairamountonnon-fundamental equilibria. Intheliteratureithasbeenanuphillclimb. Manyeconomistsremainskepticalofmultipleequilibria. But,tobefair,muchmorewidelyacceptedtodaythanit oncewas. Inthepolicyandfinancialmarketsworlds,“bubbles”are takenasself-evident. Story: Oilat$145abarrel. Marketinsiderstoldmeitwaswildlyhighandturnedout toberight.

Whatshouldpolicymakersdo? THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ECONOMISTS VERSUS THE WORLD Ihaveworkedafairamountonnon-fundamental equilibria. Intheliteratureithasbeenanuphillclimb. Manyeconomistsremainskepticalofmultipleequilibria. But,tobefair,muchmorewidelyacceptedtodaythanit oncewas. Inthepolicyandfinancialmarketsworlds,“bubbles”are takenasself-evident. Story: Oilat$145abarrel. Marketinsiderstoldmeitwaswildlyhighandturnedout toberight. Ifyouthinkitispersistentfundamentals,youmightpredict basedonarandomwalk,otherwiseyoupredictacrash.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS ECONOMISTS VERSUS THE WORLD Ihaveworkedafairamountonnon-fundamental equilibria. Intheliteratureithasbeenanuphillclimb. Manyeconomistsremainskepticalofmultipleequilibria. But,tobefair,muchmorewidelyacceptedtodaythanit oncewas. Inthepolicyandfinancialmarketsworlds,“bubbles”are takenasself-evident. Story: Oilat$145abarrel. Marketinsiderstoldmeitwaswildlyhighandturnedout toberight. Ifyouthinkitispersistentfundamentals,youmightpredict basedonarandomwalk,otherwiseyoupredictacrash. Whatshouldpolicymakersdo?

Plantoreacttoacrashifoneshouldoccur. Itisnotclearthatthisisthebestpolicy. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS CONVENTIONAL WISDOM Theconventionalwisdomistofirstofalladmitignorance.

Itisnotclearthatthisisthebestpolicy. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS CONVENTIONAL WISDOM Theconventionalwisdomistofirstofalladmitignorance. Plantoreacttoacrashifoneshouldoccur.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS CONVENTIONAL WISDOM Theconventionalwisdomistofirstofalladmitignorance. Plantoreacttoacrashifoneshouldoccur. Itisnotclearthatthisisthebestpolicy.

Ithasfocusedonfindingconditionsunderwhich non-fundamentalequilibriamayexist. Theliteraturehasthensuggestedpoliciesthatmight eliminatethenon-fundamentalequilibria. Thisisreasonable,butveryspecializedtoparticular models. And,actualpolicymakersmaybemorecircumscribedin whatcanbedone. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOMETHING SENSIBLE Thetheoryliteraturehasdonesomethingsensibleonthis question.

Theliteraturehasthensuggestedpoliciesthatmight eliminatethenon-fundamentalequilibria. Thisisreasonable,butveryspecializedtoparticular models. And,actualpolicymakersmaybemorecircumscribedin whatcanbedone. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOMETHING SENSIBLE Thetheoryliteraturehasdonesomethingsensibleonthis question. Ithasfocusedonfindingconditionsunderwhich non-fundamentalequilibriamayexist.

Thisisreasonable,butveryspecializedtoparticular models. And,actualpolicymakersmaybemorecircumscribedin whatcanbedone. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOMETHING SENSIBLE Thetheoryliteraturehasdonesomethingsensibleonthis question. Ithasfocusedonfindingconditionsunderwhich non-fundamentalequilibriamayexist. Theliteraturehasthensuggestedpoliciesthatmight eliminatethenon-fundamentalequilibria.

And,actualpolicymakersmaybemorecircumscribedin whatcanbedone. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOMETHING SENSIBLE Thetheoryliteraturehasdonesomethingsensibleonthis question. Ithasfocusedonfindingconditionsunderwhich non-fundamentalequilibriamayexist. Theliteraturehasthensuggestedpoliciesthatmight eliminatethenon-fundamentalequilibria. Thisisreasonable,butveryspecializedtoparticular models.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOMETHING SENSIBLE Thetheoryliteraturehasdonesomethingsensibleonthis question. Ithasfocusedonfindingconditionsunderwhich non-fundamentalequilibriamayexist. Theliteraturehasthensuggestedpoliciesthatmight eliminatethenon-fundamentalequilibria. Thisisreasonable,butveryspecializedtoparticular models. And,actualpolicymakersmaybemorecircumscribedin whatcanbedone.

Inprinciple,theremaybewelfaresuperiorequilibria availableintheindeterminateregion. Let’snottaketherouteofadoptingapolicytoeliminate theindeterminacy. Instead,isthereawaytorespondtoanobserved non-fundamentalshocktoimproveontheequilibrium? Commentatorsweretalkingabouthousingbubblesfor yearsbeforepricesbeganfalling. Similarlywithrecent commoditypriceincreases. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Supposethatforreasonsexogenoustothemodel, equilibriumisindeterminateandsosusceptibleto non-fundamentalshocks.

Inprinciple,theremaybewelfaresuperiorequilibria availableintheindeterminateregion. Instead,isthereawaytorespondtoanobserved non-fundamentalshocktoimproveontheequilibrium? Commentatorsweretalkingabouthousingbubblesfor yearsbeforepricesbeganfalling. Similarlywithrecent commoditypriceincreases. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Supposethatforreasonsexogenoustothemodel, equilibriumisindeterminateandsosusceptibleto non-fundamentalshocks. Let’snottaketherouteofadoptingapolicytoeliminate theindeterminacy.

Inprinciple,theremaybewelfaresuperiorequilibria availableintheindeterminateregion. Commentatorsweretalkingabouthousingbubblesfor yearsbeforepricesbeganfalling. Similarlywithrecent commoditypriceincreases. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Supposethatforreasonsexogenoustothemodel, equilibriumisindeterminateandsosusceptibleto non-fundamentalshocks. Let’snottaketherouteofadoptingapolicytoeliminate theindeterminacy. Instead,isthereawaytorespondtoanobserved non-fundamentalshocktoimproveontheequilibrium?

Commentatorsweretalkingabouthousingbubblesfor yearsbeforepricesbeganfalling. Similarlywithrecent commoditypriceincreases. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Supposethatforreasonsexogenoustothemodel, equilibriumisindeterminateandsosusceptibleto non-fundamentalshocks. Let’snottaketherouteofadoptingapolicytoeliminate theindeterminacy. Instead,isthereawaytorespondtoanobserved non-fundamentalshocktoimproveontheequilibrium? Inprinciple,theremaybewelfaresuperiorequilibria availableintheindeterminateregion.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS NEEDED: SOME THEORY Supposethatforreasonsexogenoustothemodel, equilibriumisindeterminateandsosusceptibleto non-fundamentalshocks. Let’snottaketherouteofadoptingapolicytoeliminate theindeterminacy. Instead,isthereawaytorespondtoanobserved non-fundamentalshocktoimproveontheequilibrium? Inprinciple,theremaybewelfaresuperiorequilibria availableintheindeterminateregion. Commentatorsweretalkingabouthousingbubblesfor yearsbeforepricesbeganfalling. Similarlywithrecent commoditypriceincreases.

Oneideaconcernswaystogetridoftheadhocfiltering doneinthecoreinflationmeasures. Anothersuggestedwaystogetabetterhandleonthe conceptofsystemicrisk. Andathirdwasanappealtoprovideadvicefromexisting modelsonhowtoreacttoanon-fundamentalshock,if policymakerswerewillingtobetthatanobservedprice movementwasnotdrivenbyfundamentals. Allofthesetopicsarepartofthecurrentpolicydebate. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME COMMENTS Ihaveoutlinedsomethoughtsonresearchtopicsrelatedto learningandmonetarypolicy.

Anothersuggestedwaystogetabetterhandleonthe conceptofsystemicrisk. Andathirdwasanappealtoprovideadvicefromexisting modelsonhowtoreacttoanon-fundamentalshock,if policymakerswerewillingtobetthatanobservedprice movementwasnotdrivenbyfundamentals. Allofthesetopicsarepartofthecurrentpolicydebate. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME COMMENTS Ihaveoutlinedsomethoughtsonresearchtopicsrelatedto learningandmonetarypolicy. Oneideaconcernswaystogetridoftheadhocfiltering doneinthecoreinflationmeasures.

Andathirdwasanappealtoprovideadvicefromexisting modelsonhowtoreacttoanon-fundamentalshock,if policymakerswerewillingtobetthatanobservedprice movementwasnotdrivenbyfundamentals. Allofthesetopicsarepartofthecurrentpolicydebate. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME COMMENTS Ihaveoutlinedsomethoughtsonresearchtopicsrelatedto learningandmonetarypolicy. Oneideaconcernswaystogetridoftheadhocfiltering doneinthecoreinflationmeasures. Anothersuggestedwaystogetabetterhandleonthe conceptofsystemicrisk.

Allofthesetopicsarepartofthecurrentpolicydebate. THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME COMMENTS Ihaveoutlinedsomethoughtsonresearchtopicsrelatedto learningandmonetarypolicy. Oneideaconcernswaystogetridoftheadhocfiltering doneinthecoreinflationmeasures. Anothersuggestedwaystogetabetterhandleonthe conceptofsystemicrisk. Andathirdwasanappealtoprovideadvicefromexisting modelsonhowtoreacttoanon-fundamentalshock,if policymakerswerewillingtobetthatanobservedprice movementwasnotdrivenbyfundamentals.

THREEISSUES ACOREISSUE SYSTEMICRISK NON-FUNDAMENTALEQUILIBRIA SOMECOMMENTS SOME COMMENTS Ihaveoutlinedsomethoughtsonresearchtopicsrelatedto learningandmonetarypolicy. Oneideaconcernswaystogetridoftheadhocfiltering doneinthecoreinflationmeasures. Anothersuggestedwaystogetabetterhandleonthe conceptofsystemicrisk. Andathirdwasanappealtoprovideadvicefromexisting modelsonhowtoreacttoanon-fundamentalshock,if policymakerswerewillingtobetthatanobservedprice movementwasnotdrivenbyfundamentals. Allofthesetopicsarepartofthecurrentpolicydebate.

Cite this document

APA

James Bullard (2008, September 12). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20080913_james_bullard

BibTeX

@misc{wtfs_regional_speeche_20080913_james_bullard,
  author = {James Bullard},
  title = {Regional President Speech},
  year = {2008},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20080913_james_bullard},
  note = {Retrieved via When the Fed Speaks corpus}
}