Regional President Speech

OVERVIEW DISCUSSION CONCLUSIONS DISCUSSION OF HARRIS, KASMAN, SHAPIRO, AND WEST: OIL AND THE MACROECONOMY—LESSONS FOR MONETARY POLICY JamesBullard* FederalReserveBankofSt. Louis 2009U.S.MonetaryPolicyForum NewYork,NY February27,2009 ViewsexpressedarethoseoftheauthoranddonotnecessarilyreflectofficialpositionsoftheFOMCortheFederalReserveSystem.

OVERVIEW DISCUSSION CONCLUSIONS A GREAT SUMMARY OF ISSUES Thenatureandevolutionoftheglobaloilmarket. Analysisoftheclaimofalong-lasting,demand-basedriseinoil pricesinthe2000s. Impactuneven;assessmentrequiresaglobal,general equilibriumview. NKanalysissuggeststargetingthestickyprices. Theauthorsquestionthe"anchoredexpectations"aspectofthis. HKSW:Fedoverplayedthe"coreinflation"cardduringtheoil pricerun-up. HKSW:AggressiveeasingbytheFedin2007and2008was appropriate.

OVERVIEW DISCUSSION CONCLUSIONS SOME DISCUSSION AREAS Thedemandexplanationfortherun-upinoilprices. Optimalpriceindexesformonetarypolicy. Theroadahead: long-termpricechanges. Globaldimensionsofmonetarypolicy. Interpretationsofexpectedinflation: aproblem.

OVERVIEW DISCUSSION CONCLUSIONS

OVERVIEW DISCUSSION CONCLUSIONS THE DEMAND EXPLANATION "Worldoilequilibrium"1987-2003: About$30/bblinreal2007$, WTI. Abruptstructuralchangein2003—probablystatistically significantbynow. Why? Emergingmarketsweregrowingbothbeforeandsince. A threshold? Related: The2008peakinoilpriceswaslargerinrealtermsthan the1980peak. Suggeststhattheoilshockmayhavebeenasignificant contributortothesharpdeteriorationinfall2008. Unemploymentclaimsandjobsnumbersdeterioratedbefore intensifiedfinancialturmoil. Mitigatingfactor: decliningenergyintensity.

OVERVIEW DISCUSSION CONCLUSIONS ENERGY INTENSITY

OVERVIEW DISCUSSION CONCLUSIONS CURRENT PRICE INDEXES FOR MONETARY POLICY “Coreinflation”isanarbitraryconceptforvolatilitycorrection. Whytaketheseparticularpricesout,butnotothers? CandamagethecredibilityoftheFedwhenexcludedpricesare changingrapidly. Weneedtodobetter. Oneappropriateconceptforvolatilitycorrection: filtering. Theidea:pricesthataremorevolatileprovidelessreliablesignals foroverallinflation. Allpricesgetincluded,butareweightedbyappropriate signal-to-noiseratios. Agoodareaforresearch.

OVERVIEW DISCUSSION CONCLUSIONS OPTIMAL PRICE INDEXES FOR MONETARY POLICY NKmodels: Thepriceindexshouldaggregatethepricesfrom thestickypricesector. But,observedpriceshave“degreesofstickiness.” Couldconstructanindexonthisbasis,andoilwouldpresumably beweightedzero. Stickyprices,generallyviewedastheweakestassumptioninthe NKframework. Hangourhatsonthat? Flexiblevs. stickyprices—ofaninput? Bodenstein,Erceg,Guerrieri(2008):flexibly-pricedinputusage wouldmatterforpolicymaking. Smallsharesforoil,butsharesarenotsmallforflexibly-priced inputsgenerally.

OVERVIEW DISCUSSION CONCLUSIONS LONG-TERM RELATIVE PRICE CHANGE Alotofdiscussionaboutoilrevolvesaroundthepossibilityof long-term“trend-like”behavior. Isitreasonabletothinkthattheremaybelong-term“trend-like” behaviorinoilprices? Totheextentthatoilisafiniteresource,thisseemsreasonable. Explosivedemandfromthedevelopingworldoverthecoming decades. Theoppositeofother,well-known,long-termpricetrends? ConsiderJovanovicandRousseau(2002),“Moore’sLawand LearningByDoing,”Rev.Econ.Dyn.

OVERVIEW DISCUSSION CONCLUSIONS LONG-TERM PRICE TRENDS: COMPUTERS

OVERVIEW DISCUSSION CONCLUSIONS LONG-TERM PRICE TRENDS: ELECTRICITY

OVERVIEW DISCUSSION CONCLUSIONS LONG-TERM PRICE TRENDS: MOTOR VEHICLES

OVERVIEW DISCUSSION CONCLUSIONS GLOBAL EQUILIBRIUM OpeneconomyNKmodels(CGG,2002): optimalpriceindexis tofocusondomesticprices,again,thestickysector. Thisgivesusathirdwaytothinkabouttheoptimalpriceindex. IntheNKcontext,“badpolicy”means“doesnotrespond aggressivelyenoughtoinflation.” Globalimplications? SeeBullardandSingh(2008),“Worldwide MacroeconomicStability,”J.Monet. Econ. Determinacyofworldwideequilibriumdependsonthejoint behaviorofpolicymakersworldwide. Indeterminacyexposesalleconomiestoendogenousvolatility, evenoneswheremonetarypolicymaybejudgedappropriatefrom aclosedeconomyperspective. Rationaleforatypeofinternationalpolicycoordination.

OVERVIEW DISCUSSION CONCLUSIONS INTERPRETATIONS OF EXPECTED INFLATION: A PROBLEM Theproblemwithdirectmeasuresofexpectations(p. 24,BEI). Theexpectationscanbestablebecauseparticipantsexpectthe Fedto“dotherightthing.” Butiftheexpectationsdonotmove,thepolicymakerinterprets thatasareasontodonothing. Inastandard(oneshock)NKmodel: Inflationwouldneverdeviatefromtargetbecausemonetarypolicy wouldhavethepowertooffsetshocksexactly. Surveyswouldrevealthattheprivatesectorexpectstheinflation ratetoremainexactlyatthetarget. Butnominalinterestrateswouldbemovingupanddownevery dayinresponsetotheincomingshocks. The“expectedinflationsseemwell-anchored”argumentis sometimesusedimproperlyinpolicydiscussions.

OVERVIEW DISCUSSION CONCLUSIONS OIL AND INFLATION EXPECTATIONS HKSW:Possibly,failingtorespondtopersistentoilpriceshocks wouldleavelonger-termexpectationsunanchored. Thiserodescredibilitybecausethepurposeofcoreistohelphit overallinflationtargetsmediumterm. Thepubliccannottellifthemissisintentionalorbecauseofthe persistentenergypricemovements. IlikedthesimulationsinSectionA5.

OVERVIEW DISCUSSION CONCLUSIONS MONETARY POLICY Onemainanecdotalstoryinthespringandsummerof2008: a sortofdoublingdownbehaviorbyhedgefundsandothermajor playersincommoditiesmarkets. Stoppedat2Qend. Relatedtothefinancialcrisis. TheFeddebateduringthespringandsummerwasinthe contextofalreadyaggressiveeasing. TheECBandtheFedplayeddifferentstrategies,butendedupin thesameplace.

OVERVIEW DISCUSSION CONCLUSIONS CONCLUSIONS Ilikethetopic. Ilikethepaper. Oilpriceswillremainakeyissueformonetarypolicyincoming decades.