Thursday, November 12, 2015

"Permazero," by Jim Bullard

Jim Bullard has given a talk on "Permazero." Jim frames the idea as follows:
We have, after all, been at the zero lower bound in the U.S. for seven years.  In addition, the FOMC has repeatedly stressed that any policy rate increase in coming quarters and years will likely be more gradual than either the 1994 cycle or the 2004‐2006 cycle.  In short, the FOMC is already committed to a very low nominal interest rate environment over the forecast horizon of two to three years.  Perhaps short‐term nominal rates will simply be low during this period, or perhaps the economy will encounter a negative shock that will propel policy back toward the zero lower bound.
So, liftoff (an increase in the Fed's policy rate) may or may not occur soon, but even if it does, it's quite possible that we could face a world of "permazero," i.e. low nominal interest rates for a very long time. Well, so what?
The thrust of this talk is to suppose, for the sake of argument, that the zero interest rate policy (ZIRP) or near‐ZIRP remains a persistent feature of the U.S. economy.  How should we think about monetary stabilization policy in such an environment?  What sorts of considerations should be paramount? Should we expect slow growth?  Will we continue to have low inflation, or will inflation rise?  Would we be at more risk of financial asset price volatility?  What types of concrete policy decisions could be made to cope with such an environment?  Would it require a rethinking of U.S. monetary policy?
I'll leave you to read the paper, which introduces some important policy ideas, I think.


  1. Zero inflation, watch NGDP growth, if it threatens to go down a certain constant rate, do more QE.

    1. You do understand that at zero inflation NGDP growth = Real GDP growth, right? What a dumb defense of NGDP targeting.

  2. If inflation/interest rates are stuck at zero, then go for Full Tilt Boogie Boom Times in Fat City. Labor shortages should be the goal of macroeconomic national policy.
    QE and cut IOER.
    End sadomonetarism, reduce welfare and let it rip.

  3. Sorry for not reading the full paper, but here are my 2 cents...

    You cannot rethink monetary policy without addressing the root cause of the problem, which is why we are at the ZIRP?

    My take, is the classic Keynesian take of a change in liquidity preference/increase risk aversion than is flattening the LM curve and short-cutting the connections between real and monetary markets. If we take this view then we will fail if the root problem of the risk aversion isn't corrected.

    In a side note, we don't have to resort to Keynes, we can instead start with Fisher and solve the equation for money velocity, we then can conclude that money velocity is decreasing, which is consistent to the hypothesis of an increased preference for liquidity.

    So what measures are been taken to reduce risk aversion? Have we rebuilt the trust in our financial and monetary institutions? Does anybody believe in the published accounts on banks or any other company? Do we trust the rating agencies?

    Have we prevented the occurrence of other Madoff's or Lehmans's? what has changed in the system that makes it sounder?

    Behavioral science teaches us that we are asymmetrical with gains and losses. Rich people after facing the possibility of losing their fortunes, don't want to make more money, they just don't want to lose their funds, so they are willing to pay for someone to ensure that (negative rates).

    Until we restore the connection between real and monetary markets, things will remain the same, if not worst.

    1. "...which is why we are at the ZIRP?"

      That's obvious. Policymakers put us there.

    2. Well, IMHO, I don't know if I understand you. If what you are saying that policymakers put us here by failing to regulate the financial markets, then I probably agree, although I wouldn't go that far.

      But if what you mean is that policymakers put us here by lowering the interest rates, then IMHO you are completely wrong, since interest rates are at the ZLB despite interest rate policies.

      Doesn't matter what the monetary authority does with rates, if it fails to change the liquidity preferences then rates will remain at ZLB. And that is how I read the policy changes, loosing the monetary policies was an attempt to gain monetary traction via inflationary expectations, which have failed.

      It doesn't matter if the FED lower or raises its rates, we will continue in the ZLB, if not we wouldn't be here in the first place, would we?

    3. "It doesn't matter if the FED lower or raises its rates, we will continue in the ZLB..."

      Presumably, if the zero lower bound is a bound then the Fed cannot "lower its rates." And, if the Fed "raises its rates," then we are no longer at the zero lower bound.