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

Well, let me give you one particular example. Suppose you had two models that differed in the degree of persistence in inflation—your Bank’s random walk model is one of those examples. If you get a shock to the output gap in that kind of model, it produces a cycle of inflation that lasts for an extended period of time. Suppose in the other model, if you shock it, inflation dies out quickly. If you design optimal policy for the model where inflation dies out quickly, that model is going to say don’t worry about inflation—just respond to output, and everything will be fine. The other model is going to say, no, inflation is something that you have to attack on a quarter-to-quarter basis. Every time there’s a shock to that Phillips curve model, inflation is going to take off on you unless you react. So if you’re trying to protect against the worst case in those two models, you’re going to respond aggressively.

Keyboard shortcuts

j previous speech k next speech