Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

Well, as to the first question, we have not really done a lot to address this issue, which you have raised with us before, but we are trying to give it some thought. One thing struck me over the weekend, when Governor Kohn and I went to the BIS Governors meeting. Certainly the sense of strong global growth was pervasive and more forceful among that group than I can remember for a very long time. So, if I had the Greenbook to do over again, I might push people to raise global growth a little based on what I heard the others saying at those meetings.

What we are observing in China is to some degree the result of deliberate policy actions that Chinese authorities have taken partly to respond to the pressures they are under internationally. They are seeking ways, ways perhaps not based on the exchange rate, to raise domestic demand in China. Among their concerns about how to make that happen and deal with their own perceived domestic problems is the issue of migration from the rural areas into the urban areas and the source of domestic demand arising from the huge amount of population that remains in the rural areas. So they are looking to keep people at home on the farms, so to speak, because it is attractive to be home on the farms, and they are looking to get the people home on the farms doing more consuming as a share of the total of China.

To some degree they have succeeded. Through various tax and subsidy changes and other administrative means they have raised rural incomes. One thing we have observed is very responsive behavior on the part of the Chinese population so that, if the attractiveness of being in one manufacturing urban area changes relative to being in another, you see labor moving in response. Now that you see something of a change, in general, between the manufacturing urban areas versus the rural areas, you’re also seeing people willing to go back home or to stay home in the rural areas. That is a good sign that the labor force allocation in China seems to be quite responsive to what we think of as the normal economic incentives that a market economy kicks up. That said, it does suggest that the notion of a perfectly elastic horizontal supply curve of manufactured goods out of China is a distortion and that the curve has some slope to it. But, of course, that is what we want, so we shouldn’t lament that outcome.

Over the weekend there was some interest in talking about how strong the global economy was and how much inflation might be around the corner, not just here, but everywhere. Nonetheless, reported inflation in China is down, and most of the variability in China’s inflation, as best one can tell, has been in food prices. So what made Chinese inflation appear to go up was a food-price event, and what has made Chinese inflation appear to come down is a food-price event. I’m not sensing that as yet there is a consequence of, say, this wage behavior or this relative-incomes pattern within China, in terms of a very big effect on the price at which the rest of the world can buy Chinese goods or on the availability of those goods. But it certainly has the potential to have such an effect, and it is something for which we should try to develop more sources of information.

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