Sunday, August 28, 2016

The Fed on Facebook

The Federal Reserve Board of Governors has now joined you, your grandma, and 1.7 billion of your closest friends on Facebook. A press release on August 18 says that the Fed's Facebook page aims at "increasing the accessibility and availability of Federal Reserve Board news and educational content." This news is especially interesting to me, since a chapter of my dissertation-- now my working paper "Fed Speak on Main Street"-- includes some commentary on the Federal Reserve's use of social media.

When I wrote the paper, though the Board of Governors did not have a Facebook page, the Regional Federal Reserve Banks did. I noted that the most popular of these, the San Francisco Fed's page, had around 5000 "likes" (compared to 4.5 million for the White House.)  I wrote in my conclusion that "The Fed has begun to use interactive new media such as Facebook, Twitter, and YouTube, but its ad hoc approach to these platforms has resulted in a relatively small reach. Federal Reserve efforts to communicate via these media should continue to be evaluated and refined."

About a year later, the San Francisco Fed is up to around 6000 "likes," while the brand new Board of Governors page already has over 14,000. Only a handful of people post comments on the Regional Fed pages, and they are relatively benign. "Great story! I loved it!" and the SF Fed's response, "So glad you liked it, Ellen!" are the only comments below one recent story. Even critical comments are fairly measured: "adding more money into RE market only inflates housing prices, & creates more deserted neighborhoods," following a story on affordable housing in the Bay Area.

On the Board of Governors' page, however, hundreds of almost exclusively negative and outraged comments follow every piece of content. Several news stories describe the page as overrun by "trolls." "Tell me more about the private meeting on Jekyll island and the plans for public prosperity that some of the worlds richest and most powerful bankers made in secret, please," writes a commenter following a post about who owns the Fed.

It is not too surprising that the Board's page has drawn so much more attention than those of the reserve banks. One of the biggest recurrent debates since before the foundation of the Fed surrounds the degree of centralization of power that is appropriate. The Fed's unusual structure reflects a string of compromises that leaves many unsatisfied. The Board in Washington, to many of the Fed's critics, represents unappealing centralization. To be sure, many of the commenters are likely unaware of the Fed's structure, and maybe of the existence of the regional Federal Reserve Banks. They know only to blame "the Fed," which to them is synonymous with the Board of Governors.

In my paper, I look at data from polls that have asked people a variety of questions about the Fed and the Fed Chair. Polls that ask people about who they credit or blame for economic performance appear in the table below. Most people don't think to blame the Fed for economic problems. If asked explicitly whether the Fed should be blamed, many say yes, but many others are unsure. Commenters on the Facebook page are not a representative sample of the population, of course. They are the ones who do blame the Fed.

Arguably, the negative attention on the Fed Board's page is better than no attention at all. As long as they don't start censoring negative comments-- and maybe even consider responding to some common concerns in press conferences or speeches?-- I think this could actually help their reputation for transparency and accountability. It will also be interesting to see whether the rate of interaction with the page dwindles off after it loses novelty.

Tuesday, August 16, 2016

More Support for a Higher Inflation Target

Ever since the FOMC announcement in 2012 that 2% PCE inflation is consistent with the Fed's price stability mandate, economists have questioned whether the 2% target is optimal. In 2013, for example, Laurence Ball made the case for a 4% target. Two new NBER working papers out this week each approach the topic of the optimal inflation target from different angles. Both, I think, can be interpreted as supportive of a somewhat higher target-- or at least of the idea that moderately higher inflation has greater benefits and smaller costs than conventionally believed.

The first, by Marc Dordal-i-Carreras, Olivier Coibion, Yuriy Gorodnichenko, and Johannes Wieland, is called "Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation." One benefit of a higher inflation target is to reduce the occurrence of zero lower bound (ZLB) episodes, so understanding the welfare costs of these episodes is important in calculating an optimal inflation target. The authors explain that in standard models with a ZLB, normally-distributed shocks result in short-lived ZLB episodes. This is in contrast with the reality of frequent but long-lived ZLB episodes. They build models that can generate long-lived ZLB episodes and show that welfare costs of ZLB episodes increase steeply with duration; 8 successive quarters at the ZLB is costlier than two separate 4-quarter episodes.

If ZLB episodes are costlier, it makes sense to have a higher inflation target to reduce their frequency. The authors note, however, that the estimate of the optimal target implied by their models are very sensitive to modeling assumptions and calibration:
"We find that depending on our calibration of the average duration and the unconditional frequency of ZLB episodes, the optimal inflation rate can range from 1.5% to 4%. This uncertainty stems ultimately from the paucity of historical experience with ZLB episodes, which makes pinning down these parameters with any degree of confidence very difficult. A key conclusion of the paper is therefore that much humility is called for when making recommendations about the optimal rate of inflation since this fundamental data constraint is unlikely to be relaxed anytime soon."
The second paper, by Emi Nakamura, Jón Steinsson, Patrick Sun, and Daniel Villar, is called "The Elusive Costs of Inflation: Price Dispersion during the U.S. Great Inflation." This paper notes that in standard New Keynesian models with Calvo pricing, one of the main welfare costs of inflation comes from inefficient price dispersion. When inflation is high, prices get further from optimal between price resets. This distorts the allocative role of prices, as relative prices no longer accurately reflect relative costs of production. In a standard New Keynesian model, the implied cost of this reduction in production efficiency is about 10% if you move from 0% inflation to 12% inflation. This is huge-- an order of magnitude greater than the welfare costs of business cycle fluctuations in output. This is why standard models recommend a very low inflation target.

Empirical evidence of inefficient price dispersion is sparse, since there is relatively minimal fluctuation in inflation in the past few decades, when BLS microdata on consumer prices is available. Nakamura et al. undertook the arduous task of extending the BLS microdataset back to 1977, encompassing higher-inflation episodes. Calculating price dispersion within a category of goods can be problematic, because price dispersion may arise from differences in quality or features of the goods. The authors instead look at the absolute size of price changes, explaining, "Intuitively, if inflation leads prices to drift further away from their optimal level, we should see prices adjusting by larger amounts when they adjust. The absolute size of price adjustments should reveal how far away from optimal the adjusting prices had become before they were adjusted. The absolute size of price adjustment should therefore be highly informative about inefficient price dispersion."

They find that the mean absolute size of price changes is fairly constant from 1977 to the present, and conclude that "There is, thus, no evidence that prices deviated more from their optimal level during the Great Inflation period when inflation was running at higher than 10% per year than during the more recent period when inflation has been close to 2% per year. We conclude from this that the main costs of inflation in the New Keynesian model are completely elusive in the data. This implies that the strong conclusions about optimality of low inflation rates reached by researchers using models of this kind need to be reassessed."