laurence meyer april 14,2004
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The Global Outlook & Challenges for Monetary Policy Laurence H. Meyer Senior Adviser, Macroeconomic Advisers Meyer’s • New and Old Challenges for Monetary Policy • Global Outlook Themes • Challenges to Monetary Policy • Global Influences on the U.S. Outlook Outline Meyer’s 14 16 0 2 4 6 8 H F US Foreign Percent Meyer’s 12 14 2 4 6 8 H F Foreign Percent 10-year Meyer’s HF -1 4 5 6 0 1 2 3 4-quarter growth, percent Meyer’s ForeignTRANSCRIPT
Meyer’s
The Global Outlook & Challenges for Monetary Policy
Global Issues and the U.S. OutlookGlobal Interdependence Center
April 14, 2004
Laurence H. MeyerSenior Adviser, Macroeconomic Advisers
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Meyer’s
Outline
• New and Old Challenges for Monetary Policy
• Global Outlook Themes
• Global Influences on the U.S. Outlook
• Country/Regional Developments
• Challenges to Monetary Policy
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Meyer’s
0
2
4
6
8
10
12
14
16
84 86 88 90 92 94 96 98 00 02 04
H FPercent
Foreign
US
US Consumer Price Index andTrade-Weighted Foreign Consumer Price Index
Global Disinflation & the Great Moderation
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Meyer’s
2
4
6
8
10
12
14
84 86 88 90 92 94 96 98 00 02 04
Percent
10-year
Foreign
US 10-year Treasury YieldTrade-Weighted Foreign Government Bond Yield
H F
Global trend to Higher Interest Rates
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Meyer’s
U.S. and Foreign Real GDP Growth
-1
0
1
2
3
4
5
6
1999 2000 2001 2002 2003 2004 2005
United StatesWorld
4-quarter growth, percent
US GDP Growth and Trade-weighted Foreign GDP Growth
Foreign
H F
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Meyer’s
Global Issues
• Synchronous global recovery• Initial conditions: low nominal, real rates and inflation• Little scope for monetary/fiscal stimulus• Diversity in challenges facing central banks• Adjustment of global imbalances/an asymmetry• Cyclical rebounds vs structural considerations• Common transitions: fiscal consolidation/global aging• China & India: threat or opportunity/managing success• Geopolitical uncertainty and terrorism
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Meyer’s
The U.S. Current Account Deficit
90
95
100
105
110
115
120
-560
-520
-480
-440
-400
-360
-320
2000 2001 2002 2003 2004 2005
Billions of US $1997=100
Net Exports and Real Trade-Weighted Foreign Exchange Rate
Real Trade-Weighted35-Country
Foreign Exchange Rate
Net ExportsH F
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Meyer’s
Adjustment of Global Imbalances
• U.S. current account deficit part of the global imbalance– More difficult for us or our counterparties?– Gradual or chaotic?– Sooner or later?– Narrowly or more broadly based?
• Implications of Asian accumulation of $s– Transition from private demand to official accumulation– Reduces breadth and overall amount of adjustment– Reduces immediate need for adjustment– Course of adjustment now depends on policy considerations
• Challenges– High U.S. import elasticity and initial conditions– Difficult to make adjustment unless ROW grows faster than U.S.– Japan, Euro area addicted to external demand– Difficult to be successful unless U.S. raises national saving
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Meyer’s
105
110
115
120
125
130
135
-560
-520
-480
-440
-400
-360
-320
2000 2001 2002 2003 2004 2005
net exports
Trade-Weighted35-Country
Foreign Exchange Rate
Net Exports and Trade-Weighted Foreign Exchange RateBillions of US dollars1997=100
H F
Depreciation and U.S. Net Exports
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Meyer’s
-20
-10
0
10
20
30
1990 1992 1994 1996 1998 2000 2002
12-month percent change
Crude Core PPI
The Global Rebound and Commodity Prices
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Meyer’s
16
20
24
28
32
36
40
2000 2001 2002 2003
West Texas IntermediateUS Dollars
Higher Oil Prices
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Meyer’s
-12
-8
-4
0
4
8
2000 2001 2002 2003
Nonpetroleum Import Prices3-month percentage change, annualized
How Much Pass-Through to Import Prices?
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Meyer’s
Country/regional Issues
• U.S.: productivity, employment and monetary policy
• Japan: finally a breakout and if so, why?
• Is China overheating and if so, hard or soft landing?
• Euro area: destined and content to under perform?
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Meyer’s
Productivity Growth: How much will it slow?
1
2
3
4
5
6
96 97 98 99 00 01 02 03 04 05
H F
1-year
5-year
percent
Productivity Growth
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Meyer’s
Aggregate Demand vs. Productivity Growth
-2
0
2
4
6
8
10
2000 2001 2002 2003 2004 2005
percent
GDPProductivity
GDP Growth and Productivity Growth
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Meyer’s
What Drives Monetary Policy?
2000 2001 2002 2003 2004 2005-2
0
2
4
6
8
10
2000 2001 2002 2003 2004 2005
unemployment rate
core CPI
1-quarter GDP growth
percent
The Unemployment Rate and Core Inflationin the Forecast
H F
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Meyer’s
H F
-4
-3
-2
-1
0
1
2
3
4
5
95 96 97 98 99 00 01 02 03 04 05
Percent
JapanReal GDP and Consumer Prices
consumer prices
Real GDP
H F
Real GDP Growth and Inflation in Japan
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Meyer’s
H F
0
1
2
3
4
5
95 96 97 98 99 00 01 02 03 04 05
Real GDP
Consumer Prices
Percent
EurozoneReal GDP and Consumer Prices
H F
Real GDP Growth and Inflation in Euro Area
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Meyer’s
China and India
2
4
6
8
10
12
95 96 97 98 99 00 01 02 03 04 05
China India
Percent
China and IndiaGrowth of Real GDP
H F
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Meyer’s
H F
-5
0
5
10
15
20
25
95 96 97 98 99 00 01 02 03 04 05
Consumer prices
Real GDP
Percent
ChinaReal GDP and Consumer Prices
H F
Real GDP Growth and Inflation in China
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Meyer’s
Change in Chinese Exchange Rate Regime?
• U.S., Euro, Asian, and Chinese perspectives
• Sequencing and the reluctance to float
• Consistency with domestic policy objectives
• Intermediate steps– Widening the band– Discrete revaluation– Moving to a market basket– Partial and gradual relaxation of capital controls
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Meyer’s
The Outsourcing Debate
• The magnitude of the problem?
• Bearing backlash to globalization, productivity
• Widening job insecurity related to globalization
• Winners and losers and the Pareto principle
• Reducing the gains from trade?
• The policy response
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Meyer’s
Monetary Policy around the World
• Exit problems and return to neutrality
• Learning about nonconventional policy (Japan)
• Structural constraints (Euro area and Japan)
• Productivity and monetary policy (U.S.)
• Transparency and inflation targets
• Monetary policy and bubbles
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Meyer’s
Monetary Policy in the U.S.: Sooner or Later
•Return to neutrality:– What is the neutral value of the funds rate?– What is the implicit inflation target and what is the NAIRU?– Timing of the start of tightening
• Preconditions and triggers• Higher hurdle for first move and never surprise the market• Should the Fed still “err on the side of ease?”• The two gaps story: how far from full employment & neutrality?• Accelerators: role of equity valuations, term and risk spreads• Patiently preemptive?• Does the election influence the timing of tightening?
– The pace of tightening and interaction with timing (via Greg Ip)• “Baby Steps”: Start early and move slowly• “Backloading”: Start later and then converge more quickly• “Late and Leisurely”: Start later and move slowly
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Meyer’s
Sooner or Later• Later
– Slow decline in unemployment rate, stable core inflation– Concern about inflection point/2nd half slowdown– Limited concerns with financial imbalances as accelerator– Maximin and comfort in still erring on side of ease
• Sooner– Faster decline in unemployment rate/upward rend in core inflation– Two gaps: not so far from potential/long way to neutrality– Reluctance to continue erring on side of ease– Preference for gradualism
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Meyer’s
The Taylor Rule and the MPI Call
0
2
4
6
8
10
88 90 92 94 96 98 00 02 04
Prescribed
Actual, MPI Forecast
H F
Taylor Rule Using Short-Run NAIRU
Actual, MA Forecast
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Meyer’s
Evolution of Monetary Policy in Japan
• February 1999: zero rate policy
• April 1999: first statement re precommitment– “until deflationary concerns dispelled”
• August 2000: terminated ZRP/raised policy rate ¼ pp
• February 2001: returned to (near) zero policy rate
• March 2001: adopted “quantitative easing”– Targeting current account balance at BOJ– Clarified precommitment: until CPI inflation stable at zero or above
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Meyer’s
Effectiveness of Nonconventional policy
• Limits to monetary policy: broken multiplier
• Quantitative easing
• Precommitment
• Improving the transmission mechanism
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Meyer’s
ECB
• Differences in objective conditions or strategy?
• Dismissive of “stabilization policy”
• Asymmetric re response to inflation
• Limits on monetary policy/structural constraints
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Meyer’s
Inflation Targets and Inflation Targeting
• Trend toward inflation targeting• U.S. and Japan: do not have explicit targets• Exit issue: what is the “implicit” inflation objective• Price stability vs. price stability + cushion• Transparency, accountability, and effectiveness• Hierarchical vs. dual mandates• Trade-off between inflation target & flexibility?• Explicit inflation objective within dual mandate
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Meyer’s
Monetary Policy and Asset Bubbles
• Lessons from equity bubble: – Difficult to reach timely judgment about danger of bubble– Indirect vs. direct approaches – In close call, encourages tighter policy
• Today concerns with housing bubbles in UK, Australia – Contributed at margin to decisions to tighten
• U.S.– Some talk about bond market bubble– Reaching for yield across term and risk structure– Increases exit problem