Here is the audio, video, and transcript. Here is part of the episode summary:
A longtime professor at the University of Chicago’s Booth School and former chair of the Council of Economic Advisers under President Obama, Goolsbee now brings that intellectual discipline—and a healthy dose of humor—to his role as president of the Federal Reserve Bank of Chicago.
Tyler and Austan explore what theoretical frameworks Goolsbee uses for understanding inflation, why he’s skeptical of monetary policy rules, whether post-pandemic inflation was mostly from the demand or supply side, the proliferation of stablecoins and shadow banking, housing prices and construction productivity, how microeconomic principles apply to managing a regional Fed bank, whether the structure of the Federal Reserve system should change, AI’s role in banking supervision and economic forecasting, stablecoins and CBDCs, AI’s productivity potential over the coming decades, his secret to beating Ted Cruz in college debates, and more.
COWEN: Okay, if the instability comes from the velocity side, that means that we should favor a monetary-growth rule to target the growth path of a nominal GDP, M times V, right?
GOOLSBEE: [laughs] Yes, and now you’re going to get me in trouble, Tyler. Here’s the thing I’ve known —
COWEN: You can just say yes. You’re not in trouble with me.
GOOLSBEE: I’m not going to say yes because, remember, I don’t like making policy off accounting identities. There’s no economic content in accounting identity. If you are trying to design a rule, that rule may work if the shocks are the same as what they always were in previous business cycles. I called it the golden path.
When we came into 2023, you’ll recall the Bloomberg economists said there was a 100 percent chance of recession in 2023. They announced it at the end of 2022. That’s when I came into the Fed system, the beginning of ’23.
That argument was rooted in the past. There had never been a drop of inflation of a significant degree without a very serious recession. Yet in 2023, there was. Inflation fell almost as much as it ever fell in one year without a recession. If you over-index too much on a rule that implicitly is premised on that everything is driven by demand shocks, I just think you want to be careful over-committing.
COWEN: I’m a little confused at the theoretical level. On one hand, you’re saying M times V is an identity, but on the other hand, it drives inflation dynamics.
GOOLSBEE: It’s why I started back from the . . . I bring a micro sentiment to the thinking about causality and supply and demand. I sense that you want to bring us to a, let’s agree on a monetary policy rule, and I’m inherently a little uncomfortable. I want to see what the rules say, but I fundamentally don’t want us to pre-commit to any given rule in a way that’s not robust to shocks.
COWEN: Now, you mentioned the post-pandemic inflation and the role of the supply side. When I look at that inflation, I see prices really haven’t come back down. They’ve stayed up, and I see service prices are also quite high and went up a lot, so I tend to think it was mostly demand side. Now, why is that wrong?
GOOLSBEE: There’re two parts to that. I won’t say why it’s wrong, but here are my questions. If you’re firmly a ‘this-all-came-from-demand’ guy, (A) you’ve got to answer, why did inflation begin soaring in the US when the unemployment rate is over 6 percent? Or we could turn it into potential output terms if you want, but output is below our estimate of potential. Unemployment is way higher than what we think of as the natural rate, and inflation is soaring. That already should make you a little questioning.
COWEN: I can cite M2. You may not like it. M2 went up 40 percent over a few-year period, right?
GOOLSBEE: Two, the fact that the inflation is taking place simultaneously in a bunch of countries of similar magnitudes that did not have the kind of aggregate demand, fiscal or monetary stimulus that we had in the US is also a little bit of a puzzle.
Then the third is, if you don’t think it was supply, then you need to have an explanation for why, when the stimulus rolls off, everything about the stimulus is delta from last year. We pass a big fiscal stimulus, we have substantial monetary stimulus that rolls off, the inflation doesn’t come down. Then in ’23, when the supply chain begins to heal, you see inflation come down. Those three things suggest there’s a little bit of a puzzle if you think it was all demand.
COWEN: No, I don’t think it was all demand, but you mentioned other countries. Switzerland and Japan — they import a lot. They were more restrained on the demand side. They had much lower rates of price inflation. That seems to me strong evidence for being more demand than supply.
GOOLSBEE: Wait a minute.
COWEN: I’m waiting.
GOOLSBEE: You’re going to bring in Japan?
COWEN: Yes.
GOOLSBEE: And you’re going to try to claim that Japan’s low inflation is the result of something in COVID? Japan had lower inflation all along, for decades before. They were going through deflation.
COWEN: But if it was mostly supply, a supply shock would’ve gotten them out of the earlier deflation, right? A demand shock would not have.
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