Lambda Lecture at the London School of Economics Mark Carney - - PowerPoint PPT Presentation

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Lambda Lecture at the London School of Economics Mark Carney - - PowerPoint PPT Presentation

Oct 28, 2022 462 likes •782 views

Lambda Lecture at the London School of Economics Mark Carney Governor of the Bank of England 16 th January 2017 Monetary policy trade-off Inflation relative to target Output gap 3 Monetary policy trade-off Inflation relative to target

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Lecture at the London School of Economics

Lambda

Mark Carney Governor of the Bank of England 16th January 2017

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Monetary policy trade-off

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Output gap Inflation relative to target

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Monetary policy trade-off

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Output gap Preferred trade-off Inflation relative to target

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Monetary policy trade-off

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Output gap Preferred trade-off Phillips Curve Inflation relative to target

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Monetary policy trade-off

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Output gap Preferred trade-off Phillips Curve Inflation relative to target

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Monetary policy trade-off

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Output gap Preferred trade-off Phillips Curve Inflation relative to target

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Demand shocks imply no trade-off

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Output gap Preferred trade-off Phillips Curve Inflation relative to target

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Demand shocks imply no trade-off

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Output gap Preferred trade-off Phillips Curve

Disinflationary → looser policy → return to equilibrium Inflationary → tighter policy → return to equilibrium

Inflation relative to target

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Demand shocks dominated during the “Great Moderation” (1993- 2007)…

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0.5 1 1.5 2 2.5 3

  • 1
  • 0.5

0.5 1 Inflation (%) Output gap (%)

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… whereas supply shocks have dominated post financial crisis

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1 2 3 4 5 6

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  • 2
  • 1

1 Inflation (%) Output gap (%)

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Demand shocks dominated in US…

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  • 1

1 2 3 4 5

  • 8
  • 6
  • 4
  • 2

2 4 Great moderation Output gap (%) Inflation (%)

United States

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Demand shocks dominated in US… and the euro area

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1 2 3 4 5

  • 8
  • 6
  • 4
  • 2

2 4 Great moderation Output gap (%) Inflation (%)

United States

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  • 2
  • 1

1 2 3 4 5

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  • 3
  • 2
  • 1

1 2 3 4 Great moderation Output gap (%) Inflation (%)

Euro area

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… including post crisis

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  • 1

1 2 3 4 5

  • 8
  • 6
  • 4
  • 2

2 4 Great moderation Financial crisis and after Output gap (%) Inflation (%) 8

  • 2
  • 1

1 2 3 4 5

  • 4
  • 3
  • 2
  • 1

1 2 3 4 Great moderation Output gap (%) Inflation (%)

United States Euro area

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… including post crisis

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  • 2
  • 1

1 2 3 4 5

  • 8
  • 6
  • 4
  • 2

2 4 Great moderation Financial crisis and after Output gap (%) Inflation (%) 8

  • 2
  • 1

1 2 3 4 5

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  • 3
  • 2
  • 1

1 2 3 4 Great moderation Financial crisis and after Output gap (%) Inflation (%)

United States Euro area

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Policy problem

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𝑀𝑝𝑡𝑡𝑢 ≡ 𝜌𝑢 − 𝜌∗ 2 + 𝜇 𝑧𝑢 − 𝑧𝑢

∗ 2

Deviation of inflation from target

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Policy problem

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𝑀𝑝𝑡𝑡𝑢 ≡ 𝜌𝑢 − 𝜌∗ 2 + 𝜇 𝑧𝑢 − 𝑧𝑢

∗ 2

Deviation of inflation from target Output gap

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Policy problem

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𝑀𝑝𝑡𝑡𝑢 ≡ 𝜌𝑢 − 𝜌∗ 2 + 𝜇 𝑧𝑢 − 𝑧𝑢

∗ 2

Deviation of inflation from target Output gap Preference for output stabilisation

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Simple optimal policy

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𝜌𝑢 − 𝜌∗ = − 𝜇 𝜆 (𝑧𝑢 − 𝑧𝑢

∗)

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Simple optimal policy

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𝜌𝑢 − 𝜌∗ = − 𝜇 𝜆 (𝑧𝑢 − 𝑧𝑢

∗)

Deviation of inflation from target Output gap

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Simple optimal policy

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𝜌𝑢 − 𝜌∗ = − 𝜇 𝜆 (𝑧𝑢 − 𝑧𝑢

∗)

Deviation of inflation from target Output gap Slope of the Phillips Curve

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Simple optimal policy

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Output gap Preferred trade-off Slope is −

𝜇 𝜆

Inflation relative to target

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Slopes imply 𝝁 around 0.1-0.2 since 1993… or around ¼ since 2008

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2 4 6

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  • 4
  • 2

2 Great moderation Financial crisis and after Output gap (%) Inflation (%)

  • 2.0
  • 1.5
  • 1.0
  • 0.5

0.0 0.5 1.0

  • 1
  • 0.5

0.5 1 1.5 2 Great moderation Financial crisis and after Inflation deviation from target (pp) Cumulative growth, relative to trend (%)

Data outturns MPC forecasts

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Slopes imply 𝝁 around 0.1-0.2 since 1993…and around ¼ since 2008

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2 4 6

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2 Great moderation Financial crisis and after Output gap (%) Inflation (%)

  • 2.0
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  • 1.0
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0.0 0.5 1.0

  • 1
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0.5 1 1.5 2 Great moderation Financial crisis and after Inflation deviation from target (pp) Cumulative growth, relative to trend (%)

Data outturns MPC forecasts

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Loss function with financial stability

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𝑀𝑝𝑡𝑡𝑢 ≡ 𝜌𝑢 − 𝜌∗ 2 + 𝜇 𝑧𝑢 − 𝑧𝑢

∗ 2 + 𝟐𝐺𝑄𝐷𝛾 𝒕𝑢 − 𝒕𝑢 ∗ 2 Deviation of inflation from target Output gap Financial Stability Indicators

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No stimulus in August would have meant no weight on output

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1 1.5 2 2.5 3 3.5 4

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1 Inflation (%) Output gap (%) August, no stimulus

Preferred trade-off if 𝜇=1 Preferred trade-off if 𝜇=0.1

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August stimulus traded off some inflation for more output and lower unemployment

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1 1.5 2 2.5 3 3.5 4

  • 2
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1 Inflation (%) Output gap (%) August, no stimulus August, with stimulus

Preferred trade-off if 𝜇=1 Preferred trade-off if 𝜇=0.1

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Trade-off more challenging in November

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1 1.5 2 2.5 3 3.5 4

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1 Inflation (%) Output gap (%) August , no stimulus August, with stimulus

Preferred trade-off if 𝜇=1 Preferred trade-off if 𝜇=0.1

November

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UK inflation high and volatile during the 1970s and 1980s

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  • 6
  • 4
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2 4 6 Output gap (%) Inflation (%)