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Comments on Athanasios Orphanides

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Title: Comments on Athanasios Orphanides The Quest For Prosperity Without Inflation Author: John Brian Taylor Last modified by: John Brian Taylor – PowerPoint PPT presentation

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Title: Comments on Athanasios Orphanides


1
Comments on Athanasios Orphanides The Quest For
Prosperity Without Inflation
  • John B. Taylor
  • Stanford University
  • January 8, 2000

2
Overview
  • Instant replay of monetary policy decisions
  • from the start of the Great Inflation through
    1993.
  • Postulates what information was available and was
    used to make the decisions
  • Definition of real time data
  • Calls attention to the problems with historical
    studies that simply use current data to evaluate
    past policy decisions.
  • Clarida, Gali, Gertler, Judd, Rudebusch, Taylor
  • Dramatizes the uncertainty about potential GDP
  • Also about deviations of actual GDP from
    potential.
  • Criticizes monetary policy rules with the level
    rather than the change in such deviations.

3
Constructive criticism
  • Pointing out the implications of uncertainty in
    measuring potential GDP is useful and welcome.
  • an issue about which we are all aware
  • it is why there is so much research on estimating
    potential
  • Historical charts are wonderful.
  • However, the measure of uncertainty is
  • flawed conceptually,
  • exaggerated in magnitude
  • overemphasized in comparison with other problems
  • One is left with serious doubts about the
    message.

4
The key assumption
  • Historical decisions with a monetary policy rule
    require old, un-revised data on inflation, real
    GDP and potential GDP
  • no problem for real GDP or inflation
  • But there is a problem about potential
  • no record of a potential series produced at the
    Fed in 1960s and 1970s
  • Answer to the problem?
  • Assume that the Fed used the series produced by
    the White House
  • Analogous to assuming a can opener

5
Reasons to question the assumption and thus the
conclusion
  • Potential GDP and its growth rate became
    politicized as early as the late 1960s
  • Serious economic analystslike Burns and
    Greenspanpaid no attention to it
  • The series shows a GDP gap of 15 percent in the
    mid 1970scomparable to the Great Depression!
  • Economists knew that the revision in 1977 was
    still too small.
  • Even though paper claims that this could not
    have been know in 1997.
  • Done by a lame-duck CEA that still pulled back
    from staff estimates (e.g.. 4.9 percent u)
  • Concept of potential GDP was a max not a mean

6
Reasons to worry about reacting to ?y only rather
than to y
  • Overshooting
  • Policy is too easy when economy is way above
    capacity and growing at potential growth rate
  • Undershooting
  • Policy is too tight when economy is below
    capacity and growing at potential growth rate
  • Econometric model-based evidence
  • Rudebusch (1999) modern forward/backward looking
    model (with estimates of uncertainty in
    potential)
  • Taylor (1985) VAR type model
  • Also worry about loaded words
  • prudent versus active, with cites to Friedman
    Meltzer

7
Maybe not so prudent recently (using real time
data (Fig 20))
8
Residuals as Mistakes
  • Deviations from policy rules cannot be blindly
    interpreted as mistakes some discretion is
    needed.
  • Clearly the inflationary policy in the late 1960s
    and 1970s was a mistake.
  • But the response to the 1987 stock market crash
    was not a mistake.
  • What about the high interest rates at the end of
    the great disinflation that were a deviation from
    a policy rule?
  • Strongly disagree with the following unqualified
    statement This mistake, Taylor concludes,
    accounts for the dismal performance of output in
    the early 1980s and the depth of the 1982
    recession.

9
Conclusion
  • Uncertainty in measuring potential is a problem
  • Down weight output deviations Rudebusch, Smets
  • 0.5 is already pretty low, but perhaps it could
    be lower
  • 0.0 seems too low
  • 1.0 seems too high
  • Spend a lot of time researching productivity
    growth and unemployment measures
  • Look at other variables, such as capacity
    utilization or unemployment, that help estimate
    the GDP deviations
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