Hoover Monetary Policy and Taylor Conference

May 9 we had the Hoover Monetary Policy conference, and this year it was combined with a conference in honor of John Taylor. The conference videos transcripts and slides are now up here, while the John Taylor celebration videos, slides, and transcripts are here. and I post to draw your attention to them.

I thought most of the presentations were superb. And look at the great line up of presenters! I’ll just point out a few memorable highlights. These are a bit random, and I apologize in advance to other presenters who I won’t cover. I can’t do it all in a blog post!

The first panel featuring Volker Wieland, John Williams, Agustín Carstens, Christopher Waller, Loretta Mester, Charles Plosser, and Kevin Warsh, continued a bit the John Taylor celebration, discussing how Taylor and the Taylor rule impacted the making of monetary policy at central banks.

I found Chris Waller’s comments particularly memorable. Chris delved in to the fundamental economics of why a rule is useful, and why central banks should be independent. After all, anything you can do with a rule you can do with discretion, and then some. Why limit yourself? And why is monetary policy special? If it’s just to isolate decisions from short-run political interference, that applies to all sorts of policies. Loose monetary policy just before elections is no different than stimulus checks, student loan forgiveness, or promises to exempt tips and overtime from taxes just before elections. Yet a democracy does not devolve all policy to independent technocrats, for good reasons. Why is monetary policy special?

Chris gave a great personal and intellectual summary of the answers to these questions. He starts with Kydland and Prescott’s analysis of the time-consistency problem of monetary policy. The Fed wants people now to believe it will be tough on inflation in the future, so that today’s inflation-output tradeoff is favorable. But once the future comes, the Fed will want to goose the economy with some inflation. People know that, so they expect inflation and the Fed face a poor tradeoff today. Somehow the Fed has to commit today to do things it will not want to do in the future. A rule helps to do that. That is special about the Fed. Chris takes off from here on a tour of the academic literature, his own personal evolution, and how it influenced his life as a central banker. If you want to see a policy maker with a deep grasp of economic theory, watch this!

The second panel on financial markets featured Arvind Krishnamurthy, Darrell Duffie, Luis Garicano, Charles Calomiris, and Larry Summers.

Darrell Duffie continued his tradition of explaining plumbing and its snafus with brilliant clarity. There is a basic problem of transactions that after I send you dollars, you might fail before you send me back euros. He explained how that is handled today, and how smart contracts and tokens might make the process work much better in the near future.

Luis Garicano contrasted digital dollars vs. the digital euro project, and noted the severe limitations on the latter which seem designed to hinder its adoption (and favor banks). Among those, there is a limit (likely 3,000 euros or less) and you must link digital euros to a bank account. “The Core Question: Are these limitations proportionate, or do they render the Digital Euro uncompetitive by design to shield incumbent banks from disruption?” (Isabel Schnabel objected, noting that the digital euro is designed as a payment mechanism not an asset, and the link to bank accounts meant that the 3,000 gets instantly replenished. I did not think to ask how that works for companies or transactions larger than 3,000 euros.)

Calomiris also explained how stable coins (essentially money market funds implemented via crypto) are poised to make big inroads in transactions.

Larry Summers is always worth listening to if for nothing else to appreciate his effective speaking style. I noticed a lot of variation in speaking styles. Some presenters wrote brilliant speeches but then tragically delivered them in a way that somehow went in one ear and out the other. Others have the skill to make the spoken word memorable. Larry is one of those. He also is able to extemporize in organized fashion: pick four points and only those, and explain them with clarity and economy.

One point: 250 regulators work inside a typical the bank. And they use the pronoun “we” to describe the bank. Another point: Stocks may be irrationally priced (in Larry’s view!), but “is much safer to loan somebody 96% against Microsoft stock with daily settling up than it is to loan somebody 50% against a shopping center with settling up every six years….that basic idea does not yet heavily influence our systems of financial regulation. And until it does, I think there's going to be very substantial risk.” Regulators almost never use market values. I have long thought regulation should be based on market value of equity. On reserve currency, some wise words: “…if the dollar loses its status as the reserve currency, it will be the least of our problems. … it will be because we are no longer a place that provides rule of law. It will be because we're no longer a superpower. It will be because we are no longer trusted. And if those things happen, the fact that we can't save 20 basis points…and there's some limits on the scale of our borrowing, those will be the least of our problems..” Larry also questioned the separation of monetary policy and financial regulation.

“Finishing the Job, Risks Ahead” with Mickey Levy, Jason Furman, Peter Ireland, Kristin Forbes, and Jim Bullard was a marquee panel, whose topic was the name of the conference. “Finishing the job:” When we set up the conference we were worried whether inflation would have finally settled down. It did not completely vanish, as we foresaw, so there is a job to finish. We thought risks ahead might be ahead. The next big shock already looms in the form of the Trade War, but there are plenty more to get ready for — and perhaps finally to digest the lessons of what went wrong last time?

Peter Ireland took on himself the unenviable task to poke at the Keynesian bubble in the Fed and advance a broadly monetarist view, or at least to ask for some intellectual diversity. I thought Peter also gave a great example of how to speak effectively. Watch his talk. I asked him how he obviously prepared well, but spoke while connecting with the audience where others stare at their slides or read in a monotone. The answer: He prepares a lot. Lesson learned.

Jim Bullard also brought to bear a lot of out of the box economics.

Torsten Slok gave a great lunch talk. Torsten emphasized the growth of private credit outside the banking system. And then he gave some very scary graphs about how tariffs are leading to skyrocketing uncertainty.

The first session after lunch was on geopolitical issues and strategies, with Ross Levine, H.R. McMaster, Matteo Maggiori, Chris Meissner, and Harold James. No, we did not know what was coming when we put the session together in November! But economics and security were already clearly wrapped up, especially regarding China. H.R. and I have a wonderful regular debate about these issues on the Goodfellows show with Niall Ferguson, and Hoover has hosted some really productive internal debates between national security people and economists. That is one of the great things about working at Hoover. H.R. delivered a ringing talk from the national security side of the fence. (And another example of speaking effectively!) I don’t agree with all of it, but the debate is producing a lot of convergence. I still rankle at things like “Action is necessary to counter Chinese economic aggression—coercive or non-market actions by the CPP that bully allies or hurt American manufacturing.” But I’m becoming more educated. And I’ll take some credit for H.R. now saying things like “Finally, strengthening free market economies and democratic governance could be the best means of countering the CCP’s campaign of co-option, coercion, and concealment. Deregulation and permitting reform are important to the competition with the PRC.”

The next panel was on Fiscal/Debt Sustainability Issues and Implication for Monetary Policy with John Cogan, Alan Auerbach, Michael Boskin, Hanno Lustig, and myself. John Alan and Michael did a great job outlining the fiscal challenge. Hanno is doing some great work on demand for treasury securities. And my main point: Monetary and fiscal policy always act together. All current models describe a joint monetary-fiscal contraction in which fiscal policy tightens to pay higher interest costs on the debt and to repay bondholders in more valuable dollars. If fiscal policy cannot or refuses to pay, higher interest rates cannot durably lower inflation in all current economic models.

The panels ended with the traditional “Policy Panel” featuring real policy makers, Isabel Schnabel, Alberto Musalem, Beth Hammack, and Lisa Cook, with Peter Henry moderating. All insightful. Isabel Schnabel gave a thoughtful presentation and won the art award for data-rich slides on the European economy. Lisa Cook really stepped up to the challenge to get out of the usual economic conditions raise or lower interest rates rut, and think about bigger issues, with thoughts on AI and productivity and how they might influence monetary policy. Better productivity makes everything easier. It’s nice to close on an optimistic note.

The monetary policy conference has a soft spot for economic historians, and François Velde did not disappoint with a dinner talk on the long history of the price stability objective. (Ed Nelson also gave a great talk on Milton Friedman and John Taylor on Thursday night.)

All of this was preceded by a half day conference in honor of John Taylor. You’re probably as tired as I am by now, so I’ll just advertise great presentations that manage to cogently summarize how John contributed to modern macroeconomics, including many topics beyond the Taylor Rule. I’ll highlight the panel on John Taylor in Government, with Condoleezza Rice, John Lipsky, Anne Krueger, Peter Fisher, and moderated by Sebastian Edwards. Like me, most of you have heard of the Taylor rule, and have some idea of John’s other academic achievements. But I had no idea quite how much John accomplished in government. And this is a good look under the hood of what a talented economist can accomplish with a stint in public service.

Thanks to Mike Bordo, who co-organized the conference, the indefatigable Marie-Christine Slakey who did all the hard work, and the terrific Hoover staff.

The monetary policy conference is growing and improving. Look for it next May!