Comments on "Methods of Policy Accommodation at the Interest-Rate Lower Bound" by Michael Woodford
Presented at the Federal Reserve Bank of Kansas City (FRBKC) Economic Policy Symposium on the Changing Policy Landscape, Jackson Hole, WY
If Michael Woodford says it is daunting to present his paper in front of this distinguished audience, you can imagine how daunting it is to be the discussant of his paper, which is probably the longest paper at this conference – but a paper, typically for Mike, dense with insight. I am grateful to have this opportunity, not just to discuss this paper, but to be a participant at this year’s Federal Reserve Bank of Kansas City conference.
Perhaps fittingly, today is my last day as a central banker. I think Charlie Bean will attest that I have 4-1/2 hours remaining as a member of the Bank of England’s Monetary Policy Committee [MPC]. And having spent my entire three years on the MPC with interest rates have been at the effective zero lower bound, the subject of this paper is obviously something I have been living and breathing. While I agree with some of the conclusions that the paper comes to, I find it unpersuasive how the paper comes to them. Furthermore, the paper seems to stop short of spelling out the policy implication that it does justify. So, let me try to talk that through a bit and then draw out where I think this paper leads us to, but seems to be afraid to go, in policy terms.
On even a light reading, this is clearly a paper of two halves. The first half talks about the issue of forward guidance, the work in the spirit of the original Eggertsson and Woodford (2003) paper on the lower bound, and all of the things that Lars Svensson, among others, in the past had advocated about central bank transparency with regard to interest rate paths. Then in the second half, the paper discusses the empirical side of asset purchases, such as balance sheet effects, the portfolio balance channel, preferred habitats for investors (although I do not think the author used that term directly), and so on, as though these are all distinct channels, separable from each other, and very distinct from the expectation effects through forward-guidance. And as we heard the existing empirical literature summarized in Chairman Bernanke’s remarks earlier this morning, you can list the likely channels of QE’s discernible impact in that way.
I worry that this dichotomy between forward guidance and asset purchases, while perhaps useful for research purposes, is much exaggerated in practice. There is some sense in which if a central bank policy committee is going to commit to doing something, it kind of helps to be actually doing something. And if you are going to do something, it kind of helps to explain what it is that you are doing. And so I am not sure in practical policy terms, let alone in some of the complex econometric evidence Mike goes through, that disentangling these aspects is entirely a useful exercise. In particular, what I would argue is that we always think there are multiple channels through which any monetary policy affects the economy.2 That is part of the reason why Sims and Sargent recently received a Nobel Prize, for their insights into identifying monetary policy shocks, because it is always complicated to do so, the impact being always multi-faceted. And so to be saying that we are going to disentangle the impact of central bank communications from purchases, is to me, I am worried, a step backwards.